Cement Getting into a Structural Long-Term Bull Run; Time to Invest?
Most cement stocks have already seen handsome gains; performance could continue if monsoon is normal and govt spending for rural growth continues
ETMarkets.com: Global headwinds are likely to keep the domestic stock market volatile, but cement is one sector which analysts feel could outperform the broader market in the near term supported by improvement in demand, capacity expansion as well as better realisation.
Most of the cement stocks have already started performing and this could continue in the near term if the rain gods smile after two consecutive years of drought and increased government spending to support rural growth.
Only investors with a long-term horizon should look at the cement sec- tor because things on the ground are still moving at a slower pace. Construction activity in the housing sector is still moving at a tepid pace.
All India cement production grew 10.8% YoY at 51.4 million tons for the January-February period as per data published by the Economic Advisor of India, while prices fell by 4.8% QoQ (down 7.2% YoY) on weakness in prices across regions.
“We would be inclined to believe that cement as a sector could be getting into a structural long-term bull run, though the recent uplift in terms of demand has come more from the infra pickup rather than housing pick up,” Manish Kumar, CIO at ICICI Prudential Life, said in an interview with ET NOW.
“We need to understand that housing contributes almost 70% of cement demand. Right now our visibility on housing pickup is not so great. While we could be in for a multi-year uptrend, it is likely to be gradual. It will have to wait until we see a decisive uptrend in housing,” he said.
Another factor analysts are betting on is capacity expansion, which could come only when there is a surge in economic activity. They believe the cement is a perfect play on the infrastructure boost in India owing to better balance sheet of cement companies.
“We are operating at 80% capacity and at a peak you can operate at 90% capacity and there is going to be a lot of capacity coming in cement side,” Vikram Kotak, managing partner, Crest Capital & Investment, said in an interview with ET NOW.
Brokerage firm Reliance Securities in a report said it expects FY17E to be better for cement companies mainly on a base of low volume growth, possible recovery in realisations, a pickup in construction activities and possible pickup in rural consumption on a favourable monsoon. “We expect demand from the project segment to improve further in FY17E with a pickup in construction activity, especially from concrete road projects, small and affordable housing projects and urban infrastructure projects. Our top picks include UltraTech Cement in the large-cap space and Ramco Cements and Mangalam Cement from the mid-cap segment,” the report said.
Cement prices have fallen across regions. In the north, prices have started improving in February af- ter witnessing stiff price competition over the past few month. On the other hand, prices fell in south primarily due to intense competition and in east saw weakening of prices due to slowing demand and increased supplies.
“We have been very bullish on the south-based cement players such as Dalmia Bharat and Sagar Cement. If you look at the entire production capacities, almost 55-60% is the maximum utilisation that you see in south-based cement players,” Vinay Khattar, Senior VP, Edelweiss Financial Services, said in an interview with ET NOW.