Investor's Eye
[April 05, 2013] | | |
| Summary of Contents
SECTOR UPDATE Sugar Partial decontrol-a big positive Key points -
The government recently announced a couple of important decontrol measures that would transform the sugar industry's fortunes. The government has removed the levy quota obligation as well as abolished the monthly release mechanism. The removal of levy obligation will have a substantial impact on sugar companies' profitability as the decision would increase the blended realisation by Rs1.3/kg. The abolition of the release mechanism will facilitate the free play of market forces for the commodity and enable the mills to sell their inventory as per their cash flow requirements to pay to the farmers, especially during the crushing season. The government has also refrained from increasing the excise rate in spite of an increase in its subsidy burden. We believe the government has justly considered the interests of all stakeholders, ie farmers, consumers and the industry, by taking the onus of the subsidy burden on itself. -
Lower production estimate for the next season (by 1-2 million tonne) coupled with the end of the harvesting season (in May 2013) should enable sugar prices to scale higher grounds in the coming months. However, the weak international prices will cap the upside in the domestic prices owing to the import parity. -
Among the larger companies, we feel the efficient players should trade at par to their book values owing to the improved profitability outlook after the implementation of the decontrol measures. Thus, we continue to prefer Balrampur Chini over others as it is the most efficient player and a better company on account of its leaner balance sheet and lower dependence on the international sugar prices, which are expected to remain subdued.
SHAREKHAN SPECIAL Q4FY2013 Cement earnings preview
Earnings to contract in Q4 Key points -
Expect soft performance in Q4: Despite it being a seasonally strong quarter, the earnings growth of the cement companies would be dented due to a sluggish demand environment and the continued cost pressure on the margins. Hence, the cumulative earnings of Sharekhan's cement universe are expected to decline by 13.8% on an annual basis. Shree Cement is the only company expected to post a positive earnings growth on account of the stabilisation of its merchant power plant and a relatively better cement realisation. On the other hand, the south-based companies like India Cements and Madras Cements are expected to witness a relatively higher pressure on earnings. -
Sluggish demand; weak volume offtake: The volume growth of the cement companies under Sharekhan's cement universe is expected to increase by 1-4% on an annual basis. For the full year FY2013, the all-India cement demand is estimated to grow below 6%, which is lower than the 6% demand growth registered in FY2012 and also lower compared with our estimate of 7-7.5% for FY2013. -
Realisation fails to pick-up: Given the sluggish demand environment, the average realisation was only marginally up (1-1.5%) sequentially despite it being a seasonally strong quarter. Among the various regions, the increase in the cement prices in the eastern and central regions to the tune of Rs15-20/bag on a sequential basis is relatively higher. On the other hand, the cement prices in the southern region (particularly Andhra Pradesh) have witnessed a sharp correction of Rs20-25/bag during Q4FY2013. The cement prices in other regions, like the western and northern regions, have largely remained flat on a quarter-on-quarter (Q-o-Q) basis. We estimate the average cement realisation in Q4FY2013 to be higher by around Rs80-100/tonne on a year-on-year (Y-o-Y) basis for the companies under our coverage.
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