Recent underperformance in the sector to continue. We expect cement
stocks to trade at below their average multiples for the next 12-18 months on
over-supply concerns. Sharp consensus upgrades since May have set the
stage for disappointment and we expect estimates to be aggressively
revised down over the next six to nine months, as seen in the previous cycle
when cement prices started declining.
■
Demand surprise does not amount to much against the onslaught of
capacity additions. Prices have corrected by 2-9% in south and east India
in the past four weeks despite FY10 demand growth at 11.5% YoY having
surprised positively. Utilisation levels have dropped from the peak of 101%
to 91% currently and are close to the levels previously associated with price
corrections. With no let-up in capacity addition, we forecast the demandsupply
gap to widen to 51 mn tonnes by March 2011. Demand will need to
accelerate to a 15% CAGR over FY09 to FY12 for utilisation levels to remain
around the critical 90% mark, which has never happened previously.
■
Ambuja is our top UNDERPERFORM. Barring India Cements, stocks are
still significantly higher than the trough valuation seen during the last oversupply
period. Ambuja remains our top UNDERPERFORM as it is the most
expensive Indian cement stock. We also have an UNDERPERFORM rating
on ACC and Ultratech and a NEUTRAL rating on Grasim and India Cements.