Four top brokerages in India have downgraded domestic cement firms, which recently promised to freeze prices of their products for one year.
JM Morgan Stanley, CLSA and SSKI announced the downgrade on Monday while Edelweiss did it last week. Analysts of other prominent brokerages in Mumbai told Mint, on condition of anonymity, that they were also taking a relook at cement stocks. The stocks which have been downgraded include ACC, Gujarat Ambuja, Ultratech, Madras Cement and India Cement.
Cement stocks have been continuously losing on the bourses since the Union Budget on 28 February increased the excise duty on cement by 50% to Rs600 per tonne.
The manufacturers had initially rushed to pass on the burden to their consumers by hiking the price of a 50kg cement bag by over Rs12. However, after a series of meetings with commerce minister Kamal Nath, the firms last week annouced a price freeze.
They even assured the minister that they would absorb any hike in input costs and will pass on any benefits arising out of a possible reduction in duties to the consumer.
The cement stocks continued to be battered in the stock market on Monday even as the benchmark index BSE Sensex gained 0.14%. The biggest loser was Ultratech, which closed at Rs736.15, down 5.56%. Among others, Gujarat Ambuja closed at Rs105.2, down 4.32%; ACC closed at Rs747.6, down 4.26%; and JK Cement closed at Rs138, down 3.06%.
JM Morgan Stanley Securities downgraded the cement industry from “attractive” to “cautious” because the manufacturers assured to freeze the price for one year.
“Ratings for ACC, India’s biggest cement maker, UltraTech Cement Ltd, the second largest, and Gujarat Ambuja, the fourth biggest, were cut to ‘underweight’ from ‘overweight’. The rating for Grasim Industries Ltd, the third-largest cement maker, was cut to ‘equal weight’ on income from its artificial fiber business,” analyst Akshay Soni said.
SSKI reportedly downgraded the cement earnings by 8-10%. CLSA has put Gujarat Ambuja and ACC in the ‘underperform’ category. “While the impact (of the price freeze) on earnings is minimal at about 6%-8%, the key reason to be bullish on the cement stocks has been lost as the industry has surrendered its ‘pricing power’, and with it goes any possibility of a surprise upside,” said the CLSA India Pack on the cement sector.
“Core earnings (of cement sector) downgraded by 6-12% in financial year 2007-08 estimate due to limited pricing power during the peak season,” said the Edelweiss report on cement sector released last Friday.
Edelweiss formally revised all the cement stocks ratings to sell. It had a “reduce” rating on ACC and Gujarat Ambuja, both of which have been downgraded to “sell” rating. India Cement, Madras Cement and Ultratech have also been downgraded to “sell” from “accumulate”.
The cement manufacturers on Friday met the Union commerce minister Kamal Nath and secretary of the department of industry Ajay Dua and assured that they would not hike the prices of cement for one year and will also absorb the increase in input costs in future.
Finance minister P. Chidambaram has introduced a dual structure for excise duties for the cement sector. He has chosen to reward those cement makers who sold cement at the rate of Rs190 for a 50kg bag by reducing the excise duties to Rs350 from Rs400 per tonne.
But those firms which were selling cement at Rs190 for a 50kg bag, have been subjected to a higher excise duty of Rs600 per tonne.
As cement was selling over Rs200 for a 50kg bag, the manufacturers all over the country raised the price of cement over Rs12. Consequently, the price of cement touched Rs250-Rs260 per 50kg bag in Mumbai, India’s largest cement market.