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The Ambuja Cements Ltd stock surged more than 2% on BSE on Tuesday, reacting to the company’s December quarter earnings.

A year-on-year growth of 16% in stand-alone cement sales volume was the highlight of the results. Sales volume for the quarter stood at 5.87 million tonnes.

As the accompanying chart shows, many cement producers reported double-digit volume growth in the December quarter when compared to the year-ago period.

Does that mean there is finally light at the end of the tunnel for cement demand, or is it just a favourable base effect?

To a certain extent, a low base due to demonetization did help cement sales volume growth look better in the three months ended December. Increased infrastructure spending by the government also helped, but it is a quarter or two early to call this a demand revival.

Some regional cement companies, especially in east India, did benefit from capacity additions. For some others like UltraTech Cement Ltd, volume jumped more than 30%, helped by the integration of the cement plants acquired from the Jaypee Group last year.

Since this is a pre-election year, cement demand may continue to get support from government spending on infrastructure and related activities.

But housing demand, which contributes around 60% to overall cement demand, still remains weak.

To be sure of a full-blown demand recovery for the sector, realizations too have to be sustained.

A dealer channel check by Kotak Institutional Equities showed that all-India cement prices increased by Rs5/bag on a monthly basis to Rs328/bag in January 2018, still lower than the August 2017 levels (Rs339/bag) and yet to reflect the usual seasonal strength. One cement bag weighs 50kg.

“As per DIPP (Department of Industrial Policy & Promotion) data, industry volumes increased by 17% y-o-y (year-on-year) in November 2017. However, the strong growth should be seen in the context of a low base as volumes in the year-ago-period were affected by currency demonetization in India; industry volumes in November 2016 had increased by only 0.7%. We continue to expect strong industry growth volume numbers over the next few months (until April 2018) due to a favourable base," said the broking firm.

Apart from prices, capacity utilization for the sector, currently at around 60-65%, also has to improve.

Meanwhile, the cost environment continues to be challenging for cement companies due to higher fuel and freight costs, and remains a downside risk to their fiscal year 2019 earnings.

Given these concerns, the expensive valuations of cement stocks need to correct.

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