Q3 FY10 Sector Review: Cement

Our coverage companies reported a 7.5% yoy growth, beating our estimate for a 3.6% growth. Higher revenue growth (except for ACC) was primarily driven by increased volumes (up 1-23% yoy). Average realization dipped up to 20% yoy which lead to margin erosion at ACC, Ultratech and India Cements. Grasim revenues jumped 14% yoy driven by strong VSF performance. Aggregate PAT (except for Grasim) was down 14% due to margin contraction along with increased depreciation and higher effective tax rates.

• Revenues for our coverage universe grew between 2-14% yoy (except for ACC), better than our estimate. Grasim topline grew 14% yoy as VSF division reported a 71% jump in revenues. India Cements and Ultratech revenues rose 2% and 14% respectively aided by higher volume growth. ACC revenues were largely stagnant yoy on back of ~1.2% volume growth - least amongst our coverage universe. 

• In Q3, Southern and Western regions faced severe price correction on account of increasing supplies. This resulted in 8% and 20% yoy drop in average realization for Ultratech and India Cements. However, buoyant demand in North, Central and Eastern regions led to a 4.5% increase in average realization for Ambuja. Better market mix led to flat pricing for Grasim.

• Lower realisation along with higher gypsum/royalty costs led to margin erosion for ACC, Ultratech and India Cements. OPM for Ambuja expanded 40bps yoy, due to lower power and fuel costs (Rs679/ton against Rs854/ton). A strong VSF performance led to a 13.5ppts surge in EBIDTA margins for Grasim.

• India Cements PAT declined 70% as lower realization and lack of cost control lead to 34% yoy drop in EBIDTA. Ambuja PAT declined 6% due to higher effective tax rate (39% vs. 31% in Q4 CY09).

• Since Jan’ 10, acceleration in infrastructure activity, strong housing demand, logistics issues and supply constraints have led to a sharp increase in cement prices in Northern and Eastern region. On the other hand, prices in South and West have stabilized after a swift correction seen in Q3 FY10. We expect average realization to improve sequentially in the current quarter. However, rising international coal prices (up 23% yoy to US$98/ton) and higher gypsum/royalty expenses may limit OPM upside.