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Cement stocks: Back in the limelight

May 26, 2000

With the meteorological department having announced that India will witness its 13th consecutive normal monsoon this year, cement stocks are back in the limelight. In the near term however, do not be surprised if they do not to do something dramatic. Cement is the building block of the economy. You need it for roads, bridges, buildings, homes and what not. Therefore for an economy that is on an upward path, like India, for instance, the sector is likely to get its fair share of importance. And so they got. Throughout calendar year 1999, cement stocks witnessed a surge in valuations. This was driven by better business prospects and much needed consolidation in the sector.

However one thing continued to trouble the sector. Suppressed realisations. According to the CMIE, a leading think tank on the Indian economy, cement prices on an average rose just 3.9% during FY00. This would not have been enough to even cover the increase in energy costs in some cases. Infact a number of cement companies have turned in a disappointing financial performance for FY00.

One issue that has evoked interest in the sector is the possibility of a demand supply mismatch arising in 2002. Even as fresh capacity additions slow down to a trickle, demand is expected to average atleast 8% in coming years (in FY00, demand grew by over 14%). This has raised expectations of improving realisations.

Will the recent announcement of the meteorological department trigger a rally in cement stock prices. Maybe. Or maybe not. Currently, fears of a drought and a lack of general buying sentiment in the market have doubly hit valuations of cement stocks. Unless other factors that continue to suppress buying interest in the markets are taken care of, it is unlikely that prices of cement stocks will sky rocket. But a normal monsoon, nevertheless, will dramatically improve their future business prospects.

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