We model for a cement volume CAGR of 9% over FY14-FY17 driven by political stability and a renewed Govt. thrust on big-ticket projects such as the dedicated freight corridor (est. cement consumption of 4-4.5mtpa), state metros and low-cost housing, according to Religare Institutional Research. ''A favourable base effect (FY11-FY14 growth at 3-6%) would further aid volume growth. Notably, cement dispatches have grown at 0.8x GDP growth on avg. over the past four years vs. 1.2x historically, suggesting massive pent-up demand.''
''We expect all-India utilisation to increase to 84% in FY17 from 76% in FY14 as demand outpaces supply. This should lead to a buoyant pricing environment and higher EBITDA/t for cement players (+Rs 300-400/t on avg. in the next two years for our coverage). We believe the earnings downgrade cycle has come to an end given the recent run-up in cement prices, demand pick-up particularly in northern markets, and cyclical demand recovery expected over the next 2-3 years.''
''With strong demand/price momentum expected in the next two years, we believe the cement sector is up for a re-rating. We raise our target FY16 EV/EBITDA multiple for large-caps to 9-11x (from 8-10x) and for mid-caps to 4.5-5.5x (from 3.5-4.5x), '' said Religare.
''We also raise our earnings estimates for ACC/JK Lakshmi/Birla Corp/ India Cements by 11-50%; upgrade Ambuja Cements/ACC from Hold to BUY (TP Rs 240/Rs 1,570), and India Cements from Sell to Hold (TP Rs 110); and increase targets for Ultratech Cements to Rs 2,700, Shree Cement to Rs 7,150, BCORP 430 and JK Lakshmi to Rs 205,'' it opined.
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