Apprehensions on the underperformance and profit squeeze in the cement sector have not eased completely. The stocks of the big three cement firms—ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd—have fared much better than the broader market in the last six weeks.
Did the June quarter results signal a bottom? Not quite, as the current quarter is expected to see utilizations drop or remain flat.
Perhaps the end of monsoon has set a positive note in the last two weeks. Cement prices rose between Rs 5 and Rs 50 a bag across regions, barring the south and Gujarat.
Dealers point to additional price hikes in the coming months, as despatches grow with demand and restocking after the monsoon. The three pan-India companies, which account for about two-fifths of the country’s cement production, registered a cumulative 7.5% year-on-year growth in despatches during August. This is encouraging as it follows a cumulative decline in volumes during the June quarter.
Besides, supply-side expansion may be curtailed. Several mid-sized firms have put expansion plans on hold. Watered down estimate of capacity additions is at around 54 million tonnes in the next three years, which is only half that made in the last three years.
“Cement demand growth was 0.6 times the GDP (gross domestic product) growth in FY11. Cement demand growth in the past two decades averaged at 1.2 times GDP growth, and whenever the multiplier declined materially, demand growth bounced back sharply,” said a report by India Infoline Ltd.
While this may be true, there’s also a different tale. Real estate, the biggest mover for the cement sector, is low-key with rising interest rates being the biggest deterrent to improvement; the infrastructure push is wobbling. All this was reflected in the June quarter’s macroeconomic data—the construction sector was the worst performer, with growth declining to 1.2% from 8.2% in the March quarter and 7.7% a year ago.
Also See | Positive Note (PDF)
But analysts are hopeful that cement firms will see the worst capacity utilization in the September quarter, after which they should gain pricing power. National firms may be better options to play the upturn.
The southern firms’ pricing discipline may, however, be put to test for a longer period, given that the next four months could see monsoon lowering demand. In the near term, the onset of the north-east monsoon and sluggish infrastructure activity could be key negatives, with discounts likely to be offered to push sales.
Ambuja, ACC and UltraTech seem to have the most exposure to the favourable northern, western and eastern regions, which explains why these three stocks have outperformed the benchmark Nifty of the National Stock Exchange in the past two months.
Graphic by Ahmed Raza Khan/Mint
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