Further upside in cement counters capped, say analysts
If the strong rally in cement stocks is tempting you to jump into buying these, postpone the plans, say industry analysts. According to them, any further upside movement is capped from the short-term perspective and the stocks may correct, given the prevailing high valuations.
The cement sector, which investors and fund managers kept on avoiding on the back of oversupply, took market participants by surprise when stocks started surging during the December quarter. The steep broad-based rally which followed since the beginning of this year further catapulted shares up. Companies posting robust profits and demand growth on the double-digit trajectory only stoked fuel to these stocks.
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On the stock markets, average year-to-date gains registered by cement shares are around 40 per cent, more than double what the benchmark indices witnessed, at 17 per cent, during the same period. For instance, stocks of JK Lakshmi have gained 73 per cent, while those of India Cements, JK Cement and Madras Cement jumped in the range of 40-60 per cent.
Several of these counters are either hitting their 52-weeks high or all-time highs, making industry analysts uncomfortable with the rich valuations. "Investors should exit the stocks at these levels. Cost pressure has only increased and nothing has changed fundamentally for the sector," says a research analyst at a domestic brokerage firm.
Agrees another research head. According to him, "In the short term, further upside is limited. Stocks have already corrected from their recent highs, barring a few."
A majority of the new targets post the quarterly results in recent brokerage reports are 5-15 per cent down from the current stock prices. Fitch Ratings came up with its negative outlook for the sector for 2012. The negative outlook is driven by a cyclical moderation in demand and structural over-capacity in the industry.
How demand pans out in the next financial year will be crucial for the industry, adds an analyst. "Cement players managed to restore the disciplined supply approach in the past couple of months as utilisation remained around 75-78 per cent. This helped sustain the high prices. But how long can they sustain?," she says. Currently, all-India average prices are ruling at Rs 275 for a 50 kg bag.
But industry players remain positive on growth prospects. According to the chief financial officer of a leading major, "Cost pressure is there, no doubt. But we will pass on the prices to consumers. Industry is likely to post around seven per cent growth in FY12 and in the next financial year eight-nine per cent seems achievable."
A K Saraogi, chief financial officer and president of JK Cement, says, "Several government projects did not take off in FY12. We are hopeful that in FY13, those projects will start." He also agreed that demand projections for FY13 are around eight per cent.
On costs, Saraogi adds there is substantial increase and the minimum price for cement for companies to break-even is Rs 250 a bag in the current scenario.
"Cost pressures are so much that we have to pass it on, as the industry cannot afford to sell the building commodity below costs," he says.
With 10 per cent demand growth in last month, cement industry has managed to push growth from as low as three per cent till September quarter to six per cent till January. In case February and March continue to maintain the double digit growth trend, industry's growth in FY12 will be close to 6.7 per cent, around 20 basis points less than the GDP forecasts for the year.