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Energy, cement or fmcg?

Feb 18, 2005

During 9mFY05, we have witnessed a strong run up in the indices well supported by a broad-based rally across the sectors. To put things in perspective, the quantum universe of 200 companies witnessed a topline growth of over 17% YoY while the bottomline grew at an impressive rate of over 22% YoY. The upcoming budget is likely to play a major role in the industries' performance, as the implications would have far-reaching impact.Response to the poll:

We asked our readers as to which sector is likely to outperform the economy in calendar year 2005 and the largest proportion of the readers (47%) voted in favour of energy stocks, while 38% of the participants voted in favour of the cement sector and the balance going for the FMCG sector.

Our view:

The below mentioned table clearly indicates that the cement stocks have outperformed other sectors during 9mFY05 on the bourses. While the FMCG majors witnessed extreme performance, the energy sector witnessed negative returns over the period.

Top picksApr-04Dec-04(%) change
ONGC831.05819.55-1.4%
BPCL489.75458.85-6.3%
ACC261.4338.729.6%
Guj. Ambuja301.15401.5533.3%
HLL154.8143.5-7.3%
P&G425.1583.7537.3%
  1. Energy: During 9mFY05, energy stocks have under performed despite strong volumes growth as a result of political ramifications. It should be noted that during 1HFY05, oil marketing companies were not allowed to hike product prices despite a sharp spurt in raw material (read crude oil) prices on the back of elections. Also contributing to their woes were higher subsidies on LPG and kerosene. To put things in perspective, the subsidy bill for FY05 is being estimated at Rs 210 bn as a result of skyrocketing product prices at the refinery gate, high volumes growth of these products and lower (halved as compared to FY04) government share. Going forward, we believe that the recent steps taken by the government in terms of duty cuts and price hikes have helped the companies recoup a part of the losses. Also, entry of private players is likely to bring in more deregulation.

  2. Cement: The cement sector was in the limelight in 9mFY05, thanks to the favourable demand-supply scenario working in favour of cement manufacturers. The strong demand for the commodity has been on the back of robust construction activity on the housing front. Going forward also, we believe that the industry would maintain its growth momentum at around 8% over the medium to long term. Government initiatives in the infrastructure sector (such as the commencement of second phase of NHDP, rural roads, 10,000 kms of additional highways as announced in Finance Budget) and the housing sector are likely to be the main drivers of growth for the industry. With no major capacity expansion in the pipeline, the demand-supply equation is expected to achieve parity on a macro level by FY07 and this will help in the improvement of prices. However, the hike in prices of coal and petroleum products could impact cement companies' margins (account for around 40% of sales). Though the pricing cushion exists, the margin rise will be mitigated to this extent.

  3. FMCG: During 9mFY05, the FMCG sector witnessed intense competition with the deep-pocket MNCs vying for a rising share of volumes at the expense of margins. The price war resulted in lower margins for the market leader (HLL). At the current juncture, the FMCG majors have again increased prices of certain products. We believe that prices would rise but not to the same level as before and as a result, margins would remain subdued in the near term. Also, the sector is witnessing intensifying competition from the regional players.

Although we agree that things for the energy sector are likely to improve going forward, the cement sector seems to be more buoyant at the current juncture. The reasons for the same being growing impetus on infrastructure (read roads and rural housing) and lack of any significant capacities being added in the near term would result in the demand-supply gap narrowing, thereby leaving enough room for a price hike. However, we would advise investors to read into the companies well before taking any investment decisions. Also to be remembered is the fact that the budget is round the corner and pre-empting budget measures is a risky proposition.


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