Rise in cement stock prices unsustainable over the long run  

February 11, 2010

Cement shares have been going up since the last month due to robust demand. However, concerns of oversupply are likely to hit the industry in the long run, which can lead to a correction in cement stocks, say analysts.

“The increase in cement prices over the past two months coupled with improved cement off-take due to pick up in infrastructure activity is a positive for the domestic cement industry,” said Sharekhan Ltd in a report.

Cement manufacturers increased prices backed by a demand peak in January and anticipation of higher infrastructure expenditure in the upcoming budget. The prices of cement have shot up by Rs3-Rs5 per 50kg from February to Rs235 (average national price) per bag currently. Some of these factors are being reflected in the current hike in cement stocks.

“In spite of the recent price hike, we believe the average price is unlikely to reach the levels witnessed in Q2FY10 and with the stabilisation of the new capacities, we see the prices coming under pressure from Q1FY11,” the brokerage added.

UltraTech Cement is up by 8% at Rs984.90 as on 10^th February from Rs913.20 last month. Shares of companies such as ACC, Ambuja Cements, Grasim and JK Cement have also shot up in a span of four days, from 6^th February to 10^th February. During this period, ACC was up by 2% at Rs870.10 from Rs850.30. Ambuja Cements was up 4% from Rs100 to Rs103.90; Grasim was up by 5% at Rs2704.80 from Rs2577.50. JK Cement was up by 6% at Rs151.70 from Rs142.60.

Dalmia Cement Ltd closed at Rs193.30 on 10^th February from Rs169.80 as on 29^th January, up 14%. Its sales grew by 22% at Rs509.80 crore for the December FY10 quarter from Rs409.90 crore, while the company registered an operating profit growth of 11% at Rs131.30 crore from Rs99 crore over the same period last year.

According to an analyst from a leading brokerage house, “Demand growth has been very good and this would continue for two-three months till June. After that, we will again see a price cut. This (rally in cement prices) will not sustain for long.”

ACC Ltd reported a 9% growth in sales in the December quarter of FY10 at Rs2,029.50 crore compared to Rs1,956.60 crore last year. The company’s operating profit grew by 32% at Rs622.90 crore from Rs470.90 crore in the corresponding period last year.

“It’s because of the pricing scenario, and the January demand growth for cement was up by 14%. This shows that there is good growth across the markets. There is not much pressure and cement stocks are getting absorbed by good demand growth. Another reason could be that these are under-owned stocks, which are not owned by mutual funds and ownership rests with a few people who can corner these shares,” said other analyst.

Ambuja Cements sales fell by 8% at Rs1,758.80 crore in the December FY10 quarter compared to Rs1,641.30 crore in the same period last year, while UltraTech Cement posted a 16% sales growth at Rs1,741.70 crore compared to Rs1,637.20 crore last year. UltraTech Cement registered a growth of 21% in its operating profit at Rs521.20 crore in December FY10 from Rs437.30 crore last year.

The cement industry recorded an 8% growth in the year 2008-09. India’s cement consumption has seen a sharp rise from 113.86 million tonnes (MT) in 2003-04 to close to 190MT in 2008-09.
— Ravi Samalad