Cement stocks: keeping the faith

Cement stocks: keeping the faith

New Delhi: So, cement makers haven’t formed a cartel after all. That is the corporate affairs ministry’s conclusion after an investigation (Read more)and the punters are flocking back into these stocks. Shares of ACC, Ambuja Cements, Madras Cements and India Cements rallied.

In fact, since July the shares of these companies gained some 10% compared with a 12.5% fall in the Sensex. Will the interest sustain?

The woes of the industry are well documented. Excess capacity, pricing pressure, and a demand slowdown have dimmed company earnings and the outlook. But all that is about to change, say analysts.

Firm cement prices and decent growth in dispatches in the past couple of months have helped. From a meager 2.6% growth in June, dispatches of the big three firms - ACC, UltraTech and Ambuja Cements - rose by 14.5% in July and 7.5% in August. While prices mostly remained unchanged in August, according to Sharekhan, beginning September, manufacturers have increased the cement rates by 8-10 in most parts of the country.

A set of analysts has started talking about a revival in cement demand by the end of the year. Crazy, you think, but they point to the past data to support the argument.

J. Radhakrishnan of IIFL notes:

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; we expect cement demand growth to GDP growth multiplier to return to the last decade’s average of 1.1x over FY10-14. We estimate demand growth at 6%, 9% and 10% in FY12, FY13 and FY14, respectively. Demand growth could improve as early as 2HFY12.

Radhakrishnan expects incremental demand to grow at faster pace than new supplies. As the pace of new supplies ease and demand firms up, he expects the capacity utilizations levels to increase incrementally. While it is not clear by when the projections will come true, cement stocks seems to be taking higher prices and a firm demand environment for granted. For now.