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Revisiting cement - Views on News from Equitymaster
 
 
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  • Jun 30, 2000

    Revisiting cement

    There has been a recent flurry of activity in the cement sector. Although the M&A activity has cooled off, restructuring is in full swing. And now, just as the monsoons cover the country, comes the news of rising in cement prices.

    First, a short recap. After having posted a fantastic 15% YoY growth in FY00, cement demand tapered off sharply. This was largely due to the year on year factor (last year's base was higher) and a drought in several parts of the country. The drought hit the sector in terms of realisations even as volumes remained stagnant at previous year's level.

    In the past few days, however, positive news has once again started to flow in from the sector. First was the arrival of the monsoon, which is largely anticipated to be 'normal'. Thus the fear that there will be little water for construction activity in the coming year has been put to rest. Next was the news that cement manufacturer's had effected a price hike in Bombay, which is a very large market. Similarly, prices in the South have begun to firm up. The eastern market has however remained firm throughout this period. The northern market however is the only weak spot.

    Finally, the announcement that L&T, one of India's largest conglomerates, is meeting to consider hiving off its cement division (it has oft deferred this issue) has rejuvenated interest in the sector. During the last couple of years consolidation in the sector has accelerated. By some estimates 25% of India's cement capacity has already changed hands. This has reduced the degree of fragmentation, which often leads to unhealthy price competition, in the sector to a large extent.

    All these developments increase the attractiveness of the sector from the point of view of valuations, especially when you consider that there is enormous demand for cement. On top of that is the possibility of a supply deficit in coming years.

    But timing of an investment is a key issue. And with the monsoon having arrived demand for cement would remain sluggish over the next three to four months. This also puts in doubt the possibility of manufacturer's being able to sustain the price hike in coming months. Therefore unless a clear price trend is evident it would be wise to wait for one to emerge.

    The one key development that could lead to a sudden dramatic change in valuations will be a rise in M&A activity. Already several deals are said to be on the board (involving the Birla group for one). Once they hit the market, buying interest may emerge in the sector. But nevertheless for the fundamentals to improve, one will have to wait for the monsoon to pass and a price trend to establish.

     

     

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