(Priyanka Parashar/Mint)
(Priyanka Parashar/Mint)

Cement stocks rally holds no water as price hikes may not sustain

  • Better-than-expected March quarter earnings by companies are driving the rally
  • According to companies, input costs are likely to remain stable in the near term

A clutch of cement stocks touched their 52-week highs in the last two trading sessions. Stocks of large cement firms ACC Ltd, UltraTech Cement Ltd and Shree Cement Ltd, besides mid-caps like JKCement Ltd, JK Lakshmi Cement Ltd and Ramco Cements Ltd, made considerable gains.

A combination of factors is driving the Street’s sentiments towards these stocks. One, some firms have reported better-than-expected March quarter earnings. While capacity expansions aided volumes, softening input costs provided some relief to operating expenses. Managements of cement producers indicated that input costs should remain stable in the near term.

Two, the election is over. Given the lull in the real estate sector, spending on infrastructure and allied-activities have been the only support to cement demand in the recent past. Demand had weakened in the run-up to the general elections due to a combination of factors. Cement prices have increased, government projects have slowed down, and there was a shortage of labour and water in select states.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

The hope is that the government’s increased thrust on infrastructure spending will revive cement demand. However, for the Street’s optimism to last, demand push won’t be enough. There has to be a meaningful improvement in cement prices.

A cement dealer channel check by Kotak Institutional Equities showed that price hikes, which started in the south in February, have become more broad-based now. All-India cement prices have risen from 359 per bag, which weighs 50kg, in April to 367 in May. Prices in the March quarter stood at 328 per bag. That said, the survey also showed that demand has been stagnant in most regions in the current quarter so far.

Similarly, a sentiment survey of 250 entities across the construction value chain conducted by Crisil Research Ltd painted a grim picture of near-term cement demand.

“Pan-India cement demand shall post muted 3-5% growth in the current quarter-Q1FY20 with the states in East (Bihar, Odisha) and South (Andhra Pradesh, Telangana and Tamil Nadu) moving at a snail’s pace of 2-4%. Northern and central states shall limit the fall by posting 6-8% growth in the ongoing quarter driven by institutional demand from roads, Metro, and affordable-housing. Further on the western side, while Maharashtra shall continue its healthy growth momentum in wake of upcoming state elections; Gujarat shall be laggard," said Hetal Gandhi, director at Crisil Research.

There is no harm in hoping that cement demand would pick up in the quarters to come. But existing capacity is quite large and demand growth has to be substantial to absorb it. Moreover, it needs to be accompanied by price hikes, which is doubtful for now because the June quarter is a seasonally weak one for the sector. Unless that happens, operating margins may not improve enough to justify the sector’s valuations.

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