The stocks of cement majors Ambuja Cements, ACC & UltraTech Cement have seen an excellent restoration since the 2nd fortnight of Feb, after having dropped 10-25 % over the previous months. Even as the earlier underperformance of the stocks of India’s top 3 cement companies was due to low requirement & muted realisations in the 2nd half of CY2013, the rebound has been helped by a sequence of latest cost increases. These, however supported by some capabilities nonce going off stream, are also in expectancy of a requirement recovery. The March to mid-June period is amid the peak times for cement requirement before the monsoon season kicks in. Experts say that month-on-month there has been some requirement recovery in Feb.
While the signs are positive, the near-term requirement is likely to be supported only by the consumer segment. There is little hope of govt projects picking up, given the future elections. In this backdrop that experts are sceptical and believe price and requirement may be able to remain mutable in the future, keeping the stocks under check. Though, looking at the inexpensive appraisals, investors with a 2-3 years’ perspective can accumulate on dips.
Says Mihir Jhaveri of Religare Capital Markets, “The sector has mostly underperformed the market over last year, showing earnings downgrades from the Road as requirement did not choose up, despite a favourable base” He adds that under-owned, major large-caps are dealing at near-replacement costs & can be accumulated on decreases.
Price hikes positive, but…
The price increases undertaken by cement majors (in the range of Rs 20-70, as per to analysts) are not merely led by a requirement pick-up. Experts at Credit Suisse observe provide disruptions in the north (Binani Cement) have nonce pushed up prices in the area but they do not think these are structural shifts. They believe stock prices presently factor in steep a requirement recovery in FY15.
Apart from the plant closure of Binani Cement, Birla Chetak Cement’s plant was also shut due to maintenance. Thus, with the supplies getting restricted, cement costs in the north-west region gained momentum, with Rajasthan & Gujarat recording the biggest benefits. The price increases in other regions have been in expectation of a requirement recovery in the optimum cement season.
As per to Religare channel checks, Rajasthan has seen sharp price improves of up to Rs 70 a 50-kg bag, followed by Gujarat which saw price improves of Rs 40-50 a bag while eastern and central India have seen improves of Rs 20-30 a bag. The south, in comparison, has seen a decrease of Rs 10-30 a bag on continued weakness & excess provide.
Jhaveri feels that in the first week of March cement players may see another round of cost increases in the variety of Rs 10-15 a bag. Given these price hikes (including Rs 5-25 a bag in January), the productivity of cement players is likely to be better in the March 2014 quarter as opposed to dismal performance in the Dec 2013 quarter.
Challenges remain
Moving to move ahead, though, there is a risk to realisations. While price hikes in the state of Rajasthan may not be sustainable as provide from Binani Cement & Birla Chetak resumes, there is also a risk of an adverse judgment from the Supreme Court on the sand mining problem, feel experts.
Also, of the 50 million tonnes per annum of capacity inclusion planned over the next 3 years, as much as 15 million tonnes per annum is likely to be included as beginning as in the July 2014 quarter (the remaining 35 million tonnes per annum over a period of time). This will maintain pressure on the capacity utilisation amount of the cement industry, which is at this time around multi-year lows of 70 %.
A sustainable requirement recovery may take place only if requirement from the housing (both urban & rural) and infra sectors choices up, which could happen only after the monsoon. Experts at Kotak Institutional Equities recommend that the 3.4 % requirement development in the first half of FY14 may grow to 4 % in the 2nd half, led by development in the present (March 2014) quarter. As per to their channel checks, the dealers have attributed the present state of subdued demand to the lack of absence from infrastructure projects & the organised real estate sector, even as requirement from individual house builders remains to be long lasting.
In this background and after the latest run-up on the bourses, the stocks of ACC, UltraTech & Ambuja may see limited gains in the near term. As per to experts asked by Bloomberg since the begin of Feb, the one-year average target on prices for the 3 stocks, now dealing at Rs 1,135, Rs 1,893 & Rs 167 stages take a position at Rs 1,110, Rs 1,780 & Rs 156, respectively, indicating that they are fairly valued as of now.
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