Over the last two months, dispatch growth has slowed to single digits, coming in at just 8.4% year-on-year (y-o-y) in March. For FY10, dispatches have risen 10.9% y-o-y. We expect the high base effect coupled with completion of big-ticket projects for the Commonwealth Games and Metro rail to keep dispatch growth suppressed over the next few months.
Jaiprakash Associates Ltd continued to outperform peers with a dispatch growth of 75% y-o-y in March, followed by Grasim Industries Ltd, Ambuja Cements Ltd and Shree Cement Ltd in the large-cap space. UltraTech Cement Ltd registered lower volumes on account of its presence in the southern market. ACC Ltd, too, remains a laggard with a decline in dispatches for the month. With the low base effect in the southern market in the coming months, particularly from May onwards, the south is likely to outperform other regions in terms of dispatch growth.
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With the demand slowdown, new capacity stabilization and the monsoons setting in two months from now, we are likely to see pricing headwinds across regions after May. Markets in central India are already showing signs of reduction in prices (down Rs20–25 per bag from peaks). This coupled with increasing cost pressures could dent margins going forward.
During the last six months, cement stocks have outperformed the broader market. We believe now is an opportune time to book profits as the seasonal monsoon effect, worsening oversupply situation and cost pressures will serve to dampen stock performance.
We remain negative on ACC and UltraTech and recommend profit booking in these stocks as valuations are no longer attractive. India Cements Ltd, which has run up sharply, following the increase in its Indian Premier League cricket team valuation and spike in southern market cement prices, could see some downside in the coming months. We maintain our sell recommendation on this stock.
We maintain our positive stance on large-caps, such as Grasim and Shree Cement. In the mid-cap space, we have buy recommendations on Birla Corp. Ltd and Mangalam Cement Ltd. Among mid-caps, Orient Paper and Industries Ltd could outperform the market as both its cement and fan businesses are likely to do well, supporting strong fourth quarter numbers.
Graphic by Yogesh Kumar/Mint