Stocks of large cement firms fell between 4% and 5% after a warning from the government
However, analysts say they aren’t cutting margins or earnings estimates of the companies yet
About a month before the general elections, Union minister Nitin Gadkari had warned cement companies of stern action if they formed cartels to increase the price of the key infrastructure commodity.
He has repeated the threat after the elections as well: “The price rise is not justified and the cement manufacturers seem to be moving like a cartel," Gadkari said at an event last week, adding that the government is exploring the option of approaching the Competition Commission of India (CCI).
Investors in cement stocks are suiting up and taking notice. Stocks of large cement companies fell between 4% and 5% following the transport minister’s comments.
“Government intervention has been an issue several times in the past and has weighed on stocks, although the industry has not necessarily given into pressure by reducing cement prices. We currently have a positive sector view, but watch out for developments here as any negative outcome could have a material impact," brokerage house CLSA Ltd said in a report on 7 June.
The cement industry has time and again been accused of taking concerted price hikes and indulging in cartelization. In August 2016, CCI had slapped penalties of about ₹6,300 crore on 11 cement companies for indulging in cartelization. The companies are still fighting the case in the Supreme Court.
But the moot question will be how the earnings will be impacted if the companies now reduce prices.
“Given the recent concerns raised by the transport ministry, cement companies will be cautious in taking steep price hikes from here on at least in the near-term. Till the time prices sustain around the current levels, the outlook on margins doesn’t change much. Some rollbacks, to the tune of say ₹10/bag have happened in some regions, but if we see further rollbacks then sentiment towards these stocks would turn negative," said Abhishek Anand, vice- president (equity research) at JM Financial Institutional Securities Ltd. A cement bag weighs 50kg.
According to another analyst with a domestic brokerage firm, who requested anonymity, even if prices correct, it may not necessary be an outcome of government pressure. Since the monsoon is a seasonally weak quarter for the sector, more often than not, prices tend to correct due to softening demand. “There have been times when prices have firmed ahead of monsoons due to pent-up demand, but they have hardly sustained," he added.
Unlike last year, the sector has not seen pre-monsoon demand, so dealers are pushing sales by offering discounts. According to IIFL Institutional Equities Ltd, discounts have largely resurfaced in the southern region.
In sum, the fortunes of the cement sector remain dependent on the government, both in terms of the direction of the prices, and a demand boost through infrastructure projects.