Cement Sector- 26 March 2018 (1).pdf - DEMAND-SUPPLY...

This preview shows page 1 out of 85 pages.

Unformatted text preview: DEMAND-SUPPLY IMBALANCE LIKELY TO CONTINUE CEMENT SECTOR Institutional Equities This page has been intentionally left blank Institutional Equities Cement Sector 26 March 2018 Unfavourable Demand-supply Dynamics; Stretched Valuations View: Negative The demand-supply balance essentially drives cement pricing, like in any other commodities. However, this (demand-supply relationship) had little to do to drive cement prices in the past five years as supply discipline was the key driving factor for prices, keeping them above the normal price discovery trend. Given that demand-supply gap will continue in the range of ~100mt-140mt for the next two to three years, overall capacity utilisation will hover ~70-75%. This is despite early signs of strong cement demand revival as the contribution in 2HFY18 was largely from the infrastructure segment, although demand lull in real estate segment continued in most parts of India. Hence, we believe that genuine pricing power is unlikely to come back in a hurry. Moreover, cement companies’ ability to maintain/improve operating margin will be tested, which can be attributed to: a) Demand shift towards the infrastructure sector from the remunerative real estate sector. b) Hardening of key raw materials (including inflated cost of limestone and fly-ash). c) Fuel inflation impacting energy cost. Hence, we expect EBITDAM to be flat or under pressure (except in cases of companies undergoing EBITDA correction) and effectively lack of strong earnings growth for large-cap companies. Further, the current premium valuations largely factor in the expected strong demand revival in the initial phase of recovery, leaving limited scope for a further rerating of cement stocks barring a few exceptions. We re-initiate the coverage on the cement sector with our negative view (because of stretched valuation). We have recommended Sell rating on Shree Cement, Dalmia Cement, J K Lakshmi Cement, India Cements and Heidelberg Cement. However we remain positive on select cement stocks such as The Ramco Cements and JK Cement in the mid-cap space, and Sagar Cements in the small-cap space. We believe large-cap companies (ACC, Ambuja and Ultratech) are currently fairly valued and leave little headroom for incremental gains. Milind Raginwar Research Analyst [email protected] +91-22-6273 8172 Harshit Dhoot Research Associate [email protected] +91-22-6273 8111 Demand growth aided by government-driven infrastructure capex and rural housing: During the past five years, cement demand growth remained subdued because of a) Slow housing demand. b) Limited infrastructure spending (only public spending). c) Weak private sector contribution. Post recovery from the short-term impact of demonetisation and implementation of Goods and Services Tax or GST, we expect cement demand to grow 7%8% YoY in FY19E/FY20E aided by robust government measures providing a fillip to the infrastructure sector, and rural housing offsetting continuing weakness in commercial/industrial capex and urban housing. Demand supply gap to continue as supply addition persists: While we expect demand to grow 7%-8% YoY in FY18E-FY20E, we forecast supply CAGR of 3.5% over the same period. However this is on the back of strong 130mt addition in past 5 years (FY12-FY17). Though the pace of supply growth will moderate, demand-supply gap will continue in the range of 100mt-140mt. We expect supply in the range of 460mt-480mt (rated capacity) with effective available supply in the range of 455mt-460mt (based on stabilisation period and available clinker capacity). Given the higher demand-supply gap hovering ~100mt-140mt, we expect no real return of pricing power in the cement sector. We have done sensitivity analysis with expectations of demand swinging faster (~15% YoY) than expected in the next two years as in the previous peak cycle of FY06-FY09. Despite this aggressive assumption the capacity utilization hovers ~ 75% and the demand-supply gap still persists in excess of 100 mt. Effective capacity utilisation will be sub-optimal: Effective capacity utilisation is likely to be 70%-75% during the next two years, implying that genuine pricing power to cement companies will be still at a fair distance. As cement is a regional play, capacity utilisation in southern region is expected to languish at ~60%-68%, while northern region is likely to show relatively healthier utilisation level (~ 75%-80% in FY19E/FY20E). Prefer select fundamentally sound companies in the cement space: At current valuations, we prefer The Ramco Cements (new region expansion, focus on cost control and expected demand revival in strong home market) and JK Cement (better earnings guard from white cement segment) in the mid-cap space, and Sagar Cements (presence in reviving markets like AP/Telangana with timely capacity addition and discounted valuations) in the small-cap space. We believe large-cap cement companies are currently fairly valued and leave limited headroom for gains. We have assigned Sell rating to Shree Cement, Dalmia Bharat, The India Cements, JK Lakshmi Cement and Heidelberg Cement. Market cap. Company ACC Ambuja Cement Dalmia Bharat Heidelberg Cement The India Cements JK Cement JK Lakshmi Cement Sagar Cement Sanghi Industries Shree Cement The Ramco Cement UltraTech Rating Accumulate Accumulate Sell Sell Sell Buy Sell Buy Accumulate Sell Buy Accumulate Rsbn US$mn CMP (Rs) 291 453 253 34 43 71 52 18 29 570 174 1,077 4,485 6,973 3,894 520 669 1,092 805 276 445 8,774 2,685 16,587 1,549 228 2,847 149 141 1,014 444 880 115 16,354 736 3,925 Source: Nirmal Bang Institutional Equities Research Target price (Rs) 1,582 227 2,592 126 126 1,179 389 1,058 116 15,207 887 4,302 Up/ EV/EBITDA (x) EV/Tonne (mnt) P/E (x) Down FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E (%) 2.1 13.8 12.9 11.4 117 120 117 35.0 28.1 24.0 (0.4) 9.7 9.2 8.2 195 204 199 31.5 26.2 23.4 (9.0) 14.5 12.1 11.2 207 206 206 46.0 35.7 31.5 (15.4) 12.2 10.6 9.3 116 116 115 33.2 24.5 20.2 (10.6) 9.5 8.6 7.8 68 68 70 39.4 25.4 19.3 16.3 10.9 9.3 8.6 130 126 125 21.3 16.0 13.5 (12.4) 17.1 14.8 12.4 97 96 95 54.1 36.6 22.7 20.2 13.6 8.4 5.6 72 67 54 76.0 24.3 15.2 0.9 14.8 12.9 12.2 134 146 161 25.1 20.1 18.3 (7.0) 21.7 18.0 15.9 259 259 257 41.2 33.2 28.7 20.5 16.8 14.3 12.3 168 166 167 27.2 21.7 17.6 9.6 21.0 17.3 15.0 207 207 203 46.4 38.6 30.0 Institutional Equities Table of Content Healthy demand from government’s infrastructure capex and rural housing………………………..………….….06 Cement demand expected to grow ~ 7%-8%YoYover the next two years……………………………………….…07 Demand Driver 1: Housing segment’s growth will be aided by rural market, other realty segments to remain weak……………………………………………………………………………………………………………………..….08 Organised urban housing segment will see extended weakness…………………………………………………….10 Commercial property story is no different from organised housing………………………………………………..…11 Demand Driver 2: Government-driven infrastructure creation is a bright spot in an anaemic private capex envirornment……………………………………………………………………………………………………………..…12 Strong government initiatives towards new schemes……………………………………………………………….…14 What do we expect in the next two years?...........................................................................................................16 Incremental supply unabated, demand-supply gap expected to stay in the range of 100mt-140mt……….……..17 Region-wise capacity addition- Focus shifts to eastern region………………………………………………….……18 Key raw materials available in abundance………………………………………………………………….…….….…20 Pricing power remains elusive………………………………………………………………………………..…….….21 Regional cement prices remain volatile and under pressure…………………………………………………….…...24 Cost inflation is key challenge in the next two years……………………………………………………………….….26 Valuation at a premium………………………………………………………………………………………………...….29 Annexure:…………………………………………………………………………………………………………….…..…32 Companies ACC ............................................................................................................................................. ……………….37 Ambuja Cements ...............................................................................................................................................41 Dalmia Bharat ......................................................................................................................................... ………45 HeidelbergCement India ...................................................................................................................................49 India Cements ....................................................................................................................................................53 JK Cement .........................................................................................................................................................57 JK Lakshmi Cement ...........................................................................................................................................61 Sagar Cements …………………………………..………..…………………………………………..…..……….…… 65 Sanghi Industries ...............................................................................................................................................69 Shree Cements ..................................................................................................................................................73 The Ramco Cements .........................................................................................................................................77 UltraTech Cement ................................................................................................................................. 81 4 Cement Sector Institutional Equities Key charts and tables Exhibit 1: P/E and RoE movement in divergent path Exhibit 2:Valuation and EBITDAM moving in opposite direction 0 0 FY08 FY12 P/E (LHS) Operating Profit Margin (LHS) ROE (RHS) Source: Nirmal Bang Institutional Equities Research FY17 0 FY16 0 FY15 4 FY14 9 FY13 7 FY12 20 FY11 8 FY10 18 FY09 14 FY17 40 FY16 12 FY15 27 FY14 21 FY13 60 FY11 (x) 16 FY10 (%) 36 FY09 (%) 28 FY08 (x) 80 EV/EBITDA (RHS) Source: Nirmal Bang Institutional Equities Research Exhibit 3: Earnings-focused companies high on valuation Chart Bubble Size:EBITDA/tn 20 18 EV / EBITDA (x) 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 RoE (%) ACC Ambuja Cements UltraTech Cement Shree Cement Dalmia Bharat JK Lakhmi India Cement Heidelberg Cement Sanghi Industries JK Cement Ramco Cement Sagar Cement Source: Nirmal Bang Institutional Equities Research 5 Cement Sector Institutional Equities Healthy demand from government’s infrastructure capex and rural housing During the past five years, cement demand growth remained subdued because of: a) Slow housing demand. b) Limited infrastructure spending (only public spending). c) Weak industrial capex and private sector contribution. However, reversing the short-term impact of demonetisation and early phase of GST implementation, we expect cement demand to grow 7%-8 YoY in FY19E/FY20E aided by robust government measures providing a fillip to the infrastructure sector, and rural housing offsetting sustained weakness in urban housing and commercial/industrial capex. Pan-India cement demand under pressure since the past five years During the past five years, cement demand growth remained subdued, defying the GDP multiplier link (~1.2x in stable market expanding to 1.3x during the economic recovery). However, cement demand picked up during 3QFY18 YoY, recovering from the demonetisation impact and initial phase of GST implementation, growing by a strong 11.1% YoY although on a weak base (versus ~-1%YoY in 3QFY17 and 2.7%YoY in 9MFY18). Strong infrastructure push is the key factor in driving current growth and is expected to continue in the near future barring unforeseen events. During the past five years, central and eastern region grew faster compared to other regions with a CAGR of 6.6%/3.6% over FY12-FY17 aided by: a) Focus on infrastructure. b) Low-cost housing, while traditionally strong markets such as northern and western regions reported disappointing growth rate of ~2.6%/3.6%, respectively, during the same period. Southern region reported virtually flat growth. Region-wise demand Exhibit 4: Demand in southern region disappoints Exhibit 5: Slow demand in western region because of weak urban housing demand 60 65 56 59 (MT) (MT) 62 56 52 48 53 50 FY12-13 FY13-14 FY14-15 FY15-16 44 FY16-17 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 Source: Nirmal Bang Institutional Equities Research, Industry, Crisil Exhibit 6: Northern region weighed down by weak rural and urban demand Exhibit 7: Central region relatively a bright spot 54 56 50 42 (MT) (MT) Source: Nirmal Bang Institutional Equities Research, Industry, Crisil 46 28 14 42 0 38 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 Source: Nirmal Bang Institutional Equities Research, Industry, Crisil 6 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 Source: Nirmal Bang Institutional Equities Research, Industry, Crisil Cement Sector Institutional Equities Exhibit 8: Eastern region playing catch-up in government-driven low-cost housing & infrastructure space 50 (MT) 38 25 13 0 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 Source: Nirmal Bang Institutional Equities Research, Industry, Crisil Cement demand expected to grow ~ 7%-8%YoYover the next two years According to industry sources, housing accounts for ~60% of total demand whereas infrastructure contributes ~20% and the rest is accounted for by commercial and industrial establishments. However, this is likely to undergo a change with strong infrastructure demand replacing housing demand in early signs of demand revival since 3QFY18. We have analysed the underlying demand sources in detail and tried to forecast demand growth for the sector over FY19-FY20. Housing accounts for a significant portion (~60%) of total cement domestic demand in India. Rising urbanisation, an increasing number of households and higher employment are primarily driving the demand for housing, accounting for ~60% of total cement consumption. Initiatives undertaken by the government are expected to provide an impetus to construction activity in rural and semi-urban areas through large infrastructure and housing development projects, respectively. The affordable housing segment has been in focus with two major schemes providing a fillip to growth, including Pradhan Mantri Awas Yojana-Urban (PMAY-U) and Pradhan Mantri Awas Yojana-Gramin (PMAY-G). Exhibit 9: India cement demand – Key constituents (% in total demand, current and estimated) Housing, 60% Commercial / Industrial, 20% Housing, 55.0% Infrastructure, 25.0% Rural Housing (20%) Urban Housing (Tier 1) (15%) Urban Housing (Tier 2) (25%) Commercial / Industrial, 20.0% Infrastructure, 20% Source: Industry, Nirmal Bang Institutional Equities Research 7 Source: Industry, Nirmal Bang Institutional Equities Research Cement Sector Institutional Equities Demand Driver 1: Housing segment’s growth will be aided by rural market, other realty segments to remain weak Rural housing is likely to gain momentum aided by a good monsoon and PMAY-G The government, in the President's address to the joint session of Parliament in May 2014, had announced that before the nation celebrates its 75th year of Independence (i.e., 2022), every family should have a pucca house with water connection, toilet facilities and other basic amenities. As part of the Pradhan Mantri Gramin Awas Yojana-Gramin (PMGAY-G) the government is targeting to build 30mn homes by 2022. It has allocated Rs150bn in the FY17 budget and increased the allocation to Rs230bn in FY18 (Rs202bn spent till 9MFY18). The current budget (FY19) had allocated Rs210bn for PMAY-G. Thus, funding for flagship programmes is not a constraint as it will be tied with budgetary support and borrowing from NABARD. As per the Ministry of Rural Development (MoRD), about 1.0mn houses have been constructed in rural areas under PMAY-G till November 2017. With a normal monsoon forecast for FY18-FY19 (early prediction), rural demand is expected to be strong and outpace urban demand. The India Meteorology Department’s (IMD) monsoon mission climate forecast system (MMCFS) predicts signals of moderate La Nina condition that will be favourable for Indian monsoon. However, even if it weakens, the monsoon will still be normal. . Exhibit 10: In the past two years gap between sanctioned and completed houses is narrowing (Houses) 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2011-12 2012-13 2013-14 Houses Completed 2014-15 2015-16 2016-17 Houses Sanctioned Source: iay.nic.in Urban housing: Affordable housing is strong while the organised segment continues to see headwinds 8 Pradhan Mantri Awas Yojana-Urban (PMAY-U) to drive 3.9mn urban homes: PMAY-U aims to provide ‘Housing for All’ by 2022 with the implementation between FY15-FY22 and will provide central assistance to urban local bodies (ULBs) and other implementation agencies through States/Union Territories. Currently, 1.56mn houses are at various stages of construction and ~ 0.41mn houses have been constructed since the launch of PMAY-U, according to the MHUPA (ministry of housing and urban affairs). However, the total number of affordable homes sanctioned under PMAY-U is 3.74mn for the urban poor. The total budgetary allocation by the central government in FY19 for the PMAY (U) is Rs275.0bn (budgetary allocation in the previous year’s FY16/FY17/FY18 was Rs116bn/Rs209.5bn/Rs290bn. Cement Sector Institutional Equities Exhibit 11: Implementation methodology Source: Ministry of Housing and Urban Poverty Alleviation The credit-linked subsidy scheme is used as a demand-side intervention to expand institutional credit flow to meet the housing needs of urban poor. India’s urban housing shortage is estimated to be 18.78mn. The shortage is acute across economically weaker sections (EWS) and lower income groups (LIGs), which together constitute 95% of the total housing shortage. Exhibit 12: Credit-linked subsidy scheme details Middle Income Group 1 Middle Income Group 2 Annual Income (Rs mn) 0.6 to 1.2 1.2 to 1.8 Interest Subsidy (% p.a.) 4% 3% Max Loan Tenure( in years) 20 20 Particulars Eligible Housing Loan Amount for Interest Subsidy (Rs mn) Dwelling Unit Carpet Area Discount Rate for Net Present Value (NPV) calculation of interest subsidy (%) 0.9 1.2 90 Sq.m 110 Sq.m 9% 9% Source: Ministry of Housing and Urban Poverty Alleviation Adding to that, the major benefactors of PMAY-U have been states with major cement production which include Madhya Pradesh, Rajasthan, Andhra Pradesh and Telangana which augurs well for the cement industry. Exhibit 13: Government spending on housing is on the rise 6% 40% 4% 20% 2% 0% 0% -20% -2% -40% -4% 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 60% Growth in Central Government's capital expenditure for housing Capital expenditure for Housing as % of Central Government's total capital expense Source: CMIE, Industry, Nirmal Bang Institutional Equities 9 Cement Sector Institutional Equities Organised urban housing segment will see extended weakness A confluence of high urban real estate prices, lower affordability, sluggish wage growth (particularly in the private sector), and an overall lethargic economic environment have affected demand for real estate in the urban segment. This can be seen from the exhibits below where inventory level continues to remain high and absorption level has declined to FY09 level. Understandably, new housing launches are below the lows witnessed in FY09. Exhibit 14: Absorption numbers sliding down sharply Exhibit 15: Pan-India inventory level is high (mn sq ft) 600 ('000 no...
View Full Document

  • Fall '16
  • Naman Desai
  • Supply And Demand, Capacity utilization, Nirmal Bang Institutional Equities Research

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern