Domestic cement prices are unlikely to correct drastically in the second half of ’07-08 (FY08) and ’08-09 (FY09), according to foreign brokerage CLSA, due to likely delays in capacity addition coupled with sustained demand.
The brokerage attributes the likely slowdown in capacity additions in FY08 and FY09 to rise in lead-time for cement equipment delivery, delays due to land acquisition and environmental issues, among the few reasons.
"We project a maximum 14% capacity CAGR until the end of FY09 and expect demand growth to nearly catch up," CLSA said in a note to clients, justifying its higher-than-average earnings estimates for cement companies in FY08 (20% above market estimates) and FY09 (35-40% above market estimates).
This forecast is contrarian to other brokerage consensus that prices could fall during ’08-09 because of a supply glut - a resultant of the planned capacity build-up. Currently, the total capacity in the domestic cement industry is roughly 160mt.
In recent times, most analysts have recommended buying cement shares for the period till the first half of ’07-08, as the excess of demand corresponding to supply is expected to drive up product prices further.
Though there is unanimity that demand for cement would remain robust between ’06-07 and ’08-09, led by demand from infrastructure, housing and special economic zones (SEZs), the views are divided with regards to supply.
In its recent note to clients, brokerage Edelweiss said, "Post Q1FY08E, the operating peak, we believe that there is limited upside in valuations for the cement sector due to 70.6mtpa capacity additions by FY09 (estimated), with a likely overcapacity scenario in South."
SBI Capital Markets and Merrill Lynch also echo this view and feel prices are likely to witness a downturn, as supply is likely to exceed demand.
"The growing capacity pipeline will likely compress the sector’s valuation multiples in FY08E (next year) in anticipation of an earnings downturn in FY09E (the year after)," Merrill Lynch noted.