UPDATES
Cement: Shree or UltraTech? Not turning BUYers yet
Whilst cement volumes increased in November and early December, we now sense weakness and expect less than 4%/5% volume growth countrywide in FY17/FY18. Hence, expectations of high volume growth from UltraTech/Shree could disappoint. Firstly, as UltraTech brings Jaypee's recently acquired inefficient capacities on stream at a time when demand is weak, it will have to support pricing by not pushing for market-share gains in extant capacities. On other hand, Shree's capex/opex efficiencies will help it gain market share. Secondly, Shree's industry-leading RoCE, high cash generation and smaller scale will keep growth materially higher than industry levels for the next decade. Hence, Shree's target valuation of 13x FY19E EBITDA is higher than UltraTech's 11.5x. We reduce near-term estimates, but more so for Shree given higher dependence on North/East (hardest hit by demonetisation). UltraTech's target multiple reduction leads to a higher valuation cut. With Shree offering 5% upside, 10% correction could make us turn BUYers. We prefer Shree over UltraTech (SELLers on both). (Nitin Bhasin, +91 22 3043 3241)
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