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Indian cement has recently had a rare combination of multiple positives, i.e. higher
government spend, rural demand, new plant commissioning delays, poor logistics,
a fall in blending rates, low fuel prices leading to tight utilization, and earnings
upgrades. We expect demand to taper off as a lack of water hampers
construction, the start-up of new supplies lead to lower utilization, and companies
are unable to pass on a hike in fuel cost (if any) to end users. We cut earnings 3-
36% in FY10e and 23-33% in FY11e; Ambuja and Grasim are our top Sells.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Forecast Change
Companies featured
ACC (ACC.BO),INR814.35 Sell
2008A 2009E 2010E
P/E (x) 10.2 10.0 17.1
EV/EBITDA (x) 6.2 5.8 9.5
Price/book (x) 1.8 2.6 2.4
Ambuja Cements Ltd (ABUJ.BO),INR100.75 Sell
2008A 2009E 2010E
P/E (x) 11.9 13.0 19.5
EV/EBITDA (x) 7.4 7.0 9.2
Price/book (x) 1.9 2.5 2.4
Grasim (GRAS.BO),INR2,509.10 Sell
2009A 2010E 2011E
P/E (x) 7.1 10.1 14.7
EV/EBITDA (x) 4.5 5.2 6.6
Price/book (x) 1.3 1.7 1.5
UltraTech Cement (ULTC.BO),INR804.85 Sell
2009A 2010E 2011E
P/E (x) 6.6 9.4 15.9
EV/EBITDA (x) 4.4 5.7 8.0
Price/book (x) 1.9 2.2 1.9
Shree Cement (SHCM.BO),INR1,605.25 Hold
2009A 2010E 2011E
P/E (x) 3.2 7.6 11.1
EV/EBITDA (x) 2.2 3.6 5.6
Price/book (x) 2.0 3.0 2.4
India Cements (ICMN.BO),INR131.20 Sell
2008A 2009E 2010E
P/E (x) 9.1 7.3 10.6
EV/EBITDA (x) 7.0 5.9 6.3
Price/book (x) 1.6 1.0 0.9
Global Markets Research Company
Alas, a downcycle for the cement sector?
Our revised estimates suggest that cement demand growth will be 4-6% over
H2FY10e, resulting in a drop in utilization levels by 4.4% over our earlier forecast.
This implies that despite the recent sharp fall in cement prices, the downside risk
to cement prices remains. Cement profitability in EBITDA/t could drop to FY04
lows – suggesting that the next 12 months could be tough for the industry.
Our sector estimates are amongst the lowest on the Street
Our revised estimates factor in a 2% decline from cement prices in Q3 and
Q4FY10e and a further 5% decline in cement prices in FY11e, with a revival in
FY12e. With these assumptions, we downgrade our earnings by 3-36% for FY10e
and 23-33% for FY11e for companies in the sector.
Valuations factor in tight utilizations levels over the next 12 months
After 15% sector outperformance, the cement stocks under our coverage are
trading above replacement values, factoring in tight utilization levels over the next
12-18 months. We expect cement price corrections following weak utilization
levels to result in valuation correction to below replacement levels. We use a
combination of P/E and EV/EBITDA multiples for valuation in the sector. Based on
our revised estimates, we recommend Underweight on the sector moving to Sell
ratings on Ambuja Cements, Grasim, UltraTech, ACC, and India Cement. We also
downgrade Shree Cement to Hold. Important risk factors are the ability of cement
companies to form production arrangements, demand surprise as we start the
busy season, and M&A news. (See p. 15 for valuations and p. 16-17 for risks.)
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