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Cement: Bracing for 2QFY04

Oct 3, 2003

With a decent monsoon and a good first quarter GDP growth, the 2QFY04 results of India Inc. are being awaited with bated breath. The cement industry too, is bracing itself for an increase in demand, now that the monsoons have almost come to an end. Against this backdrop, let us analyse the performance of the three Ďbiggiesí of Indian cement industry over the past four quarters.

ACC:  Although, the (erstwhile) largest cement producer in the country recorded impressive growth in volumes (15%) in FY03, the topline growth was marginal on account of poor realisations in the industry. The company is among the most sensitive to price fluctuations and as a result, when prices fell, the operating margins of the company came under pressure and hovered around the 10% mark in the period under consideration. The net profit margin of the company also came under pressure on account of the high leverage of the company. However, if the 1QFY04 results are any indication, things are beginning to look up as the operating margin of the company has already climbed up to the 15% mark and net profits have also improved considerably. The stock is currently trading at Rs 202, a P/E of 24.6x of its projected FY04 earnings. Although the company has improved its operating margins in 1QFY04 and has exited from some of its non-core businesses, the valuation still looks stretched.

Gujarat Ambuja:  Like all its peers in the industry, Gujarat Ambuja also experienced a fall in realisations (9%) in FY03, but impressive volume growth of 37% meant that the company was able to tide over the problem and realise a topline growth of 25% and a bottomline growth of 18%. The company is the most cost efficient player in the cement industry and as a result the operating margin of the company hovered around the 20% mark even during these bad times. At Rs 231, the stock trades at a P/E of 12.4x its projected FY04 earnings. Considering the fact that the company is the lowest cost producer of cement in the country and is also able to utilise its capacity effectively by resorting to exports, the valuation of the company seems to be attractive.

Grasim:  For most part of FY03, Grasim banked on its VSF division for growth, as it was a subdued year for the cement industry. Although the volume of cement division increased by 12% in FY03, the divisionís contribution to Grasimís topline remained stagnant at 46%. On the other hand, VSF divisionís contribution to topline increased by almost 17% and it contributed 35% to Grasimís topline in FY03. However, for 1QFY04, the sales of VSF division suffered on account of poor capacity utilisation and now with prices of VSF inputs expected to increase, the cement division is likely to act as the growth engine for Grasim in the future. The stock is currently trading at Rs 663, a P/E of 11x of its projected FY04 earnings. With L&Tís cement division in the bag and the cement industry looking poised for growth, the valuation seems to be attractive. But it should also be borne in mind that FY03 was a record year for Grasimís VSF division and from here on the growth in VSF division is expected to remain stable.

Although, the 2QFY04 results for most of the cement majors are not likely to be impressive on account of extended monsoons, the construction activity and hence the demand is likely to pick up post monsoon and will be reflected in 3QFY04 results. Therefore, come Diwali as prices firm up, we might see some fireworks in the cement sector.

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