Investor's Eye
[August 19, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q1FY2014 Cement earnings review
Stress is showing; no immediate re-rating trigger despite steep correction The Q1FY2014 earnings performance of most cement companies failed to meet expectations, which were subdued to begin with. The volume offtake was flattish at best and the profitability was under pressure due to a rising cost (a higher freight cost in the wake of an increase in diesel prices and railway freight cost) and lower blended realisation. Overall, the earnings of the Sharekhan cement universe declined by 23.6% as compared with Q1FY2013. Going ahead, the demand outlook could improve post-monsoon season and the government's efforts to push stalled large infrastructure projects could result in a low single-digit growth in cement volumes in FY2014. Though the recent steep correction in the cement stocks factors in a large part of the negatives, but we don't see any re-rating trigger for the cement sector in the immediate term. In such a scenario, we continue to prefer UltraTech Cement (UltraTech) due to its strong balance sheet, pan-India presence and the recent correction in its stock price. -
Aggregate revenues grew marginally by 1.8% YoY: During the quarter under review, the aggregate revenues of the cement companies in Sharekhan's cement universe grew marginally by 1.8% year on year (YoY) to Rs18,806 crore. The revenue growth was supported by a 0.6% year-on-year (Y-o-Y) uptick in the volumes. The average realisation declined by 4% YoY due to a sluggish demand environment whereas the other businesses, like power (in Shree Cement), viscose staple fibre (VSF; in Grasim Industries [Grasim]) and real estate (in JP Associates Ltd [JAL]) accounted for the rest of the growth in the universe's revenues. -
Volume growth remains a mix bag; India Cements and Madras Cements take the lead: India Cements and Madras Cements reported a volume growth of 13.6% and 4.7% YoY respectively due to a low base effect and the stabilisation of their new capacities. On the other hand, Shree Cement posted a Y-o-Y decline of 7.9% in its volume. For the pan-India large players the volume decline was limited: UltraTtech (-0.3%), and ACC and Ambuja Cements (3-5%) YoY. -
Realisation remains lower both QoQ and YoY: The cumulative realisation of the cement makers under our coverage declined sharply by 4% YoY in the quarter largely on account of a slowdown in the demand from the infrastructure and housing space and an increase in the supply of cement. The realisation of the all-India players improved on a sequential basis but that of the southern players declined QoQ. According to the recent channel checks, the cement prices are flat as compared with the average of Q1FY2014. In the near term, cement prices are likely to remain at the current level on account of the slowdown in the demand and increase in the supply. -
Margin remains under pressure: On the operating profit margin (OPM) front, the cumulative OPM of the cement companies under our coverage contracted by 513 basis points to 25.9% during the quarter under review on account of a decline in the realisation and a surge in the freight cost due to the fuller impact of the increase in the diesel prices and railway freight cost. Among the companies in Sharekhan's cement universe, India Cements, Shree Cement and Madras Cements posted a margin contraction of 700-1,000 basis points YoY in Q1FY2014. On the other hand, UltraTech witnessed relatively less pressure on its margin in the same period. -
Earnings declined by 23.6% YoY: The cumulative earnings of Sharekhan's cement universe declined by 23.6% YoY in Q1FY2014 largely on account of a muted revenue growth and a sharp contraction in the margin. Among the companies under our coverage, the south-based companies like India Cements and Madras Cements reported a contraction of 40-80% YoY in their earnings. Shree Cement also posted a decline of 19.1% in its earnings on account of a 677-basis-point contraction in its margin. Companies like UltraTech witnessed relatively less pressure on earnings. Outlook
Given the lower than expected demand growth in FY2013 (below 6%) and challenging environment expected in H1FY2014, we believe the volume growth will be unable to support the revenue growth of cement companies in FY2014. Further, the sustainability of cement price at the current levels is a key risk going ahead in anticipation of an increase in the supply of cement because of the stabilisation of the new capacities. In addition, the cost pressure in terms of higher freight charges continues to keep the margins under pressure. However, from H2FY2014 onwards a recovery is expected in the demand environment on account of faster approvals of infrastructure projects and a likely increase in government spending. Hence, we maintain our neutral view on the cement sector but remain positive on selective cement companies. We prefer UltraTech due to its strong balance sheet, pan-India presence and the recent correction in its stock price.
MUTUAL GAINS | Debt Mutual Fund Picks Bond / Debt market round up -
Bonds yields surged as bond markets witnessed their worst month since January 2009, after the Reserve Bank of India's (RBI) measures to reduce volatility in the rupee pushed up short-term rates. The RBI had to put on hold its monetary-easing steps due to continued weakness in the domestic currency. On July 15 and July 23, the central bank announced a series of measures to curb volatility in the foreign exchange market. It increased the Bank Rate and Marginal Standing Facility (MSF) rate to 10.25% (300 bps spread with the repo rate), fixed a daily limit on banks' borrowing under the Liquidity Adjustment Facility (LAF) window at 0.5% of Net Demand and Time Liabilities (NDTL) and announced open market sales of securities worth Rs. 12,000 crore. The RBI further added that the banks have to maintain a minimum daily Cash Reserve Ratio (CRR) balance of 99% of the requirement instead of 70% on an average daily basis with effect from July 27, 2013. This led to a sharp increase in short-term rates and bond yields. -
The 10-year benchmark bond ended up 73 bps to close at 8.17% (as on 31st July, 2013), compared to its previous month's close of 7.44%. It has further hardened to 8.88% as on 16th August, 2013. Bond / Debt Outlook -
Bond yields are expected to increase as deprecation in domestic currency coupled with increase in headline inflation has dented sentiments. Recent measures by the RBI have made short-term borrowing expensive, which triggered outflow from the bond market. Investors will focus on the movement of the rupee and direction of foreign fund inflows. The RBI will conduct the auction of Government Securities and Treasury Bills for an aggregate amount of Rs. 79,000 crore and 48,000 crore, respectively in August.
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Regards,
The Sharekhan Research Team | |
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