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

The Economic Times - - Companies: Pursuit Of Profit -

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.

LONG-TERM STORY

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