Indocement Tunggal Prakarsa (INTP IJ, Rp14,850 BUY) Looking into FY11 - Danareksa

Rational pricing is vital
In our last meeting with the company, Indocement explained that it would continue to be margins-oriented rather than market-share oriented. Currently, it has production capacity of around 19.0mn tonnes, or well above last year’s production of 13.6mn tonnes. Hence, the company does not plan to significantly expand its production capacity, unlike its main competitors Semen Gresik and Holcim. With the additional capacity coming on stream, it is crucial that cement producers remain rational in regard to their pricing in order to assure returns on their new investments. Thus, despite the additional capacity coming from Semen Gresik (most likely in FY12) and Holcim (in FY13), market players will be forced to maintain selling prices to ensure returns.

Not easy to raise selling prices
The ASP of cement was pretty flat at Rp1,060,000 per tonne in FY10, or up only 1.1% yoy. According to Indocement, it would be a challenge to raise selling prices, especially since it would open up the price gap between domestic selling prices and the price of imported cement. The company mentioned that cement from China could go as low as US$50 per tonne. However, with transportation and logistics costs imported cement could enter the market at US$100 per tonne. So far, imported cement has not entered the domestic market due to a range of issues including brand equity, quality issues and the small price differential. Nonetheless, potential competition from imported cement will limit the ability of domestic cement producers to raise selling prices in the domestic market.

Domino effect from infrastructure
We believe that cement demand growth could reach around 8% in FY11. Last year, domestic cement demand was 6.3% yoy, or inline with the GDP growth. Indocement sees that domestic demand for 2011 shall likely be in line with the GDP growth of around 6-6.5%. However, we feel there are two key areas which could significantly impact cement demand: 1) accelerated budget spending and 2) land legislation for public utilities. In FY10, the state budget disbursement was still quite low, but hopes are that some of the issues have now been addressed – paving the way for higher budget spending. Moreover, land legislation for land acquisition is being discussed by the House of Representatives and is expected to be approved in 1H11.

Maintain BUY
We believe Indocement is well placed to capture growth and maximize profits. Its rivals, in contrast, are operating near to full capacity and are busy expanding their plants. Indocement has the largest spare capacity at the moment. We reiterate our BUY recommendation on the counter with a Target Price of Rp19,820.

Looking at the potential of ready mix
Indocement intends to increase revenues generation from ready mix and concrete. With prospective infrastructure and property development, the potential for higher sales of ready mix and concrete is high. Currently, only 20% of the company’s total sales are generated from bulk cement with the rest accounted for by bagged cement. Indocement currently has 18 mixing plants and plans to add another 2-3 mixing plants in FY11 with capex of around US$2.4-3.6mn. This represents around 4-5% of the total capex spending of US$60-70mn earmarked for FY11. Most of the capex is for routine maintenance.