Beware the exuberance in cement stocks
ACC Ltd’s strong earnings performance fuelled market participants’ optimism on cement stocks. Also, the recent reduction of the goods and services tax (GST) on many products has increased hopes of a tax cut for the cement sector
Key Indian benchmark indices—the Nifty and the Sensex—touched record highs on Tuesday. Among the major beneficiaries of this rally were cement stocks.
ACC Ltd’s strong earnings performance fuelled market participants’ optimism on cement stocks. Also, the recent reduction of the goods and services tax (GST) on many products has increased hopes of a tax cut for the cement sector.
Rewarded for posting a better-than-expected June quarter result, the ACC stock rose more than 14% intraday on the National Stock Exchange (NSE). The company’s cement volumes grew 7.4% on a year-on-year basis, exceeding analysts’ estimates of 4-5% growth. Another positive surprise was realization growth, which was aided by premium products and improved regional sales mix.
In a rub-off effect, shares of UltraTech Cement Ltd, Ambuja Cements Ltd, Shree Cement Ltd, Dalmia Bharat Ltd, Orient Cement Ltd and India Cements Ltd too rallied around 4-9% on NSE.
However, the increase seen in ACC’s realizations may not mean that everything is hunky-dory for the sector. Fundamental challenges such as a subdued pricing environment and input cost pressures remain.
Consequently, on a year-to-date basis, key cement stocks have posted negative returns. Some have declined more than the Nifty Commodities index during that span (see chart).
The latest dealer channel check by IIFL Institutional Equities Ltd showed that pan-India cement prices were hiked by around 3% in June-end. This was done to pass on the cost increases, but then, prices partially reversed in July.
“Our channel checks indicate commencement of discounts in the current month, owing to an intensifying monsoon. An additional price hike of up to 2-3% is required in fiscal year 2019 to maintain the FY18 Ebitda per tonne. While producers are likely to attempt price hikes post monsoons, we believe sustainability of price rise is difficult, as seen in the past two quarters,” the brokerage house said in a report dated 20 July. Ebitda stands for earnings before interest, tax, depreciation and amortization.
This means the sector’s profitability is likely to remain muted even in fiscal year 2019. As for volume growth, it has been driven by the ramp-up of acquired assets and a low base.
Last week, the GST rate on paints, varnishes and many white goods was cut from 28% to 18%. Currently, cement along with some other items remains in the highest tax bracket of 28%. The market is hoping the GST Council at its 4 August meeting may decrease the tax rate on cement.
In short, the rally may not sustain and valuations of cement stocks are still expensive.
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