India Cement
Plant Visits to Southern
Region Confirms our Bearish
View on the Sector
Reiterating cautious view post plant visits: We
visited various plants across Southern India to
understand the demand supply scenario in the region.
We expect around 28.4m tons of new capacity to be
commissioned by end C2009 in the states of Andhra
Pradesh, Tamil Nadu and Karnataka. The new capacity
constitutes around 43% of existing capacity. Based on
this, we expect utilization rates in the region to decrease
to 75% in F2011 leading to a fall in cement realizations.
We reiterate our Cautious view on the sector and expect
the southern region to show early and higher declines in
realizations compared to other regions in the country.
What's new: We have made changes to our Demand
Supply model. Out of the total 20m tons of new capacity
we expected during the quarter, almost 8.5m tons has
already been commissioned and a further 11m tons is
expected by June 2009. Even though in some cases
there have been delays of around 3-4 months in
commissioning the plant, we believe the amount coming
on stream dwarfs the impact of the delay. Further the
new capacity will be operational during a period which
coincides with the onset of monsoon (traditionally a
weaker cement demand period) and post election period
when infrastructure spending would have slowed down.
Pricing assumptions remain the same: We expect
prices in the region to decline by 7.5% in F2010 and a
further 5% in F2011. Amongst our coverage, Ultratech,
Grasim and ACC have 8.3%, 7.2% and 7.2% market
share in south respectively. Moreover, Ultratech and
ACC are putting fresh capacity in this region which will
not only increase the exposure of these companies to
the region but also make it difficult to show volume
growth in an already crowded market. The southern
region has seen healthy prices on the back of strong
demand over the last 2-3 years which we believe should
come under pressure post this new supply.