Cement dispatches have surprisingly shown strong growth in the last five months, after having reported dismal growth for October 2008.
Notably, cement dispatches grew by 8-10% in the last five consecutive months as against the dismal 4.5% growth registered in October 2008.
Our channel check with the dealers and several industry experts suggests that the strong demand for cement in the last couple of months has been on account of the heavy infrastructure activities due to pre-Election spending by the government and strong demand from rural housing.
Also, we believe that revival in demand with respect to several infrastructure activities that were halted during 2HCY2008 has also led to additional demand for cement.
Average cement prices have been inching up since the last couple of months. It may be noted here that cement prices were hiked several times during Jan - March 2009, taking the average cement prices higher by Rs8-10/bag.
The price hike was seen more in the Western and Central regions, where the average prices have increased by Rs10-12/bag and Rs8-10/bag, respectively. However, the lowest price increase was seen in the Southern region due to already higher prices.
Our channel checks attribute the price hikes to the strong dispatch numbers and supply side constraints like wagon shortages.
We expect cement prices to peak out soon and decline from 2QFY2010, with supply catching up and demand slackening ahead of the pre-monsoon season.
We estimate the Indian Cement industry to add around 70mn tonnes over the next two years and therefore believe that the average cement prices for FY2010 would be lower by 8-10% over FY2009 levels.
However, easing of input costs like imported coal prices (down by 65% from peak) and freight costs with cuts in diesel prices would aid the cement companies to protect their Margins amidst falling demand and prices.
The cement stocks have rallied in the recent past and outperformed the BSE Sensex by a substantial 28% YTD in 2009. Post this rally, we believe that valuations of cement stocks are no longer cheap considering the imminent downturn.
Hence, we re-iterate our Neutral view on the Sector, while recommending a Sell on ACC and Reduce on Ambuja Cements and Madras Cements.