Cement stocks could deliver negative returns relative to the market for the second straight year, if the sluggish sales in December are any indication.
ACC Ltd, the country’s largest cement manufacturer, reported a 6% decline in volumes last month and other large manufacturers managed only single-digit growth rates.
Sales were affected by plant shutdowns, a pile-up in inventory in certain markets and low demand in north India, probably because of a severe winter.
An analyst tracking the cement sector says inventory build-up in the central and northern belts may get liquidated only by the end of January, and sales could continue to be sluggish in these areas. Besides, maintenance shutdowns were postponed at a number of plants, and companies are now being forced to allow these shutdowns.
After a decent recovery in their share prices between June and September, shares of large cement companies such as ACC Ltd, UltraTech Cement Ltd and Ambuja Cements Ltd have since underperformed the Nifty between 28% and 35%.
Companies focused on the southern markets such asIndia Cements Ltd and Madras Cements Ltd, did slightly better—their level of underperformance stood at 23% since mid-September.
This is because of a favourable demand-supply gap in these markets, which has enabled south-based companies to raise prices at a much faster rate.
The relentless rise in cement prices in southern markets recently prompted the state government in Tamil Nadu to threaten manufacturers, but the markets don’t seem to be unduly worried about any concrete action. They corrected marginally after the government statement, but continue to be the most attractive bets in the sector. In a recent research note, Alchemy Share and Stock Brokers Pvt. Ltd says, “The southern region has witnessed the highest price hike in the last one year and this buoyancy will continue till the end of FY09 at the very least.”
In addition, when supply catches up with demand in fiscal 2010, southern markets, such as Tamil Nadu and Kerala, would be partly insulated from a correction in cement prices because of its large distance from the surplus capacity that is expected to come up in the North. (The western belt, which could service some southern markets, is expected to be in deficit in fiscal 2010). Prices in the western and central belts may come under pressure, however, because of their proximity to both the southern and northern cement capacities.
While stocks such as India Cements and Madras Cements have outperformed peers because of a better pricing scenario, they continue to trade at a discount based on forward earnings multiples.
According to Alchemy, south-based companies are the best way to take an exposure in the cement sector, at least until prices peak in 2009.
Should banks listen to the finance minister’s call for a 50 basis points interest rate cut so that “it stimulates investment and consumption.” Although the year-on-year growth in credit has come down to 22%, lending has picked up recently. For the three months or so between the end of September and the end of December, bank credit rose by Rs96,367 crore—well above the rate of increase in bank deposits, which went up by Rs77,678 crore over the period. That’s not all—the rise in credit has been accelerating in November and December. True, liquidity is abundant at the moment, evident from the fall in money market rates and in the steady fall in the 10-year government bond yields. But that’s because of bond sales and interest payments on the special deposits scheme, which have resulted in a one-off rise in liquidity. If current trends in bank credit and deposit growth continue, liquidity will tighten. That’s why bankers want to see action by the Reserve Bank of India before they start easing rates.
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