The robust growth in cement dispatches seen over the past five-six months has surprised the street and has led to considerable re-rating of cement stocks.
For May 2009, dispatches of cement majors (ACC, Ambuja Cements, Ultratech Cement and Grasim Industries) have grown by 11.1% year on year (y-o-y).
However even after the recent adjustments in the earnings estimates for cement makers, we believe, there still exists scope for further surprises and upgrade in consensus estimates.
Our optimism stems from three key factors:
1) The decisive mandate to the incumbent United Progressive Alliance (UPA) can potentially result in better-than-expected demand environment on the back of the government’s enhanced focus on infrastructure development and due to overall improvement in business sentiment;
2) The unexpected strong price hike of Rs15-20 per bag in the past two months;
3) The easing of pressure on the margins of cement companies due to softening of raw material prices (especially coal) and strong margin performance in Q4FY2009.
All the four companies from Sharekhan’s universe (Grasim Industries, Shree Cement, Ultratech Cement and Madras Cement) have posted better-than-expected bottom line growth in Q4FY2009.
The cumulative earnings of these four companies grew by 12.7% as against the street expectations of a double-digit decline in their aggregate earnings.
The cumulative operating profit margin (OPM) improved by 422 basis points sequentially mainly due to moderation at cost front (mainly coal prices) and increase in domestic realisation. The OPM declined by 44 basis points yoy to 28.2%.
On a cautionary note, the onset of monsoons and the usual seasonal correction in realisation could dent the sentiments in near term. We expect a correction of Rs8-12 per bag over the next two-three months.
However, the near-term weakness provides a good opportunity to accumulate cement stocks.
In cement stocks, we continue to prefer Ultratech Cement and Shree Cement due to their relatively early capacity expansion.
We also like Orient Paper & Industries on the back of its attractive valuation and diversified business model. We are revising the price target of these three stocks.