It’s Time to Book Profits on South-based Cement Stocks
Tepid demand, lower capacity utilisation, weak prices in South make analysts cautious on these cos’ growth
ET Intelligence Group: In the last six trading sessions, the stocks of South-based cement firms such as TheRamcoCements,NCLIndustries, India Cements, KCP and Sagar Cements have increased by 5-30%.
These stocks came into the limelight after Sagar Cements reported a strong year-on-year growth of 42% in cement production and 16% in dispatches in March 2016. A section of investors seems to believe that these numbers are a proxy for the kind of growth that can be expected from cement producers in the south region. Such an assumption, however, doesn’t seem to factor in issues such as tepid demand and lower prices in the southern parts of the country. In the northern, central, and western regions, cement prices have increased by 15-30% in the past four months. But, they have fallen in the South by 4-10% during the period.
In addition, the south region has excess capacity at a time when the demand is not yet picking up. Thirdly, due to low cement prices, capacity utilisation across the southern states is expected to be well below 55%, which is not profitable enough to enhance margins. Another point is that Sagar Cements’ sales and production growth in March 2016 was high com- pared to the lower base in March 2015 quarter. The company received limestone mining lease permission in December from the Andhra Pradesh government which boosted its cement production.
Due to these factors, analysts are not considering a major growth in revenues for the South-based cement companies for the March quarter. They anticipate sales of the South-based cement firms to fall in the range of 3-13% for the March quarter on a year-on-year comparison. Given this, investors need to be cautious while making fresh investments in the stocks of these companies.