Aug 6, 2004|
Cement: Concrete gains ahead?
Cement stocks have witnessed strong buying activity during the last one-week. Infact, the top two gainers on the Sensex during the previous week have been sector pivotals like Gujarat Ambuja and ACC. This prompted us to have a re-look at the cement sector prospects. Here we look at whether the current trend is sustainable or is it plain bargain hunting at lower levels?
During 2003, when almost all commodity stocks were having a dream run on the bourses, cement stocks were not exactly hot property and big guns like Gujarat Ambuja and ACC had under performed the indices by a significant margin. The reason for this was two-fold. First, until the end of 2003, the growth in despatches was a modest 4% and secondly, due to considerable overcapacity in the industry, realisations were rather unremunerative. Thus, cement players were being hit from both the sides, low realisations as well as subdued demand. The tide, however, began to turn for the good from January onwards and helped by strong despatches during the last quarter (4QFY04) of the previous fiscal, the cement industry managed to close the year with a rather respectable growth of around 6%.
While the demand growth did soothe investors' nerves, what further encouraged them was the rise in prices that followed and which have continued till date. Just to put things in perspective, majors like ACC and Grasim have reported realisations improvement in the region of 12%-15% during 1QFY05! This can be attributed to the absence of significant capacity addition in FY04, which helped in narrowing the demand-supply gap and consequently improving the prices. Further, with no significant capacity addition envisaged over the next couple of years, prices are likely to improve from (or at worse sustain at) the current levels. For an industry, which works on rather low operating margins, improvement in realisations can give a significant boost to operating profits. For e.g. improvement in realisations of around 5% can improve the operating profits of a cement company by as much as 33% if we assume operating margins to be in the region of 15%! Thus, better prices translate into even higher profitability.
Apart from reducing demand supply gap, increased consolidation in the industry will also ensure stability in prices. With Grasim's acquisition of L&T's cement division, the industry will now have the top six players accounting for nearly 60% of the industry capacity. This is a healthy sign for the industry, as this would result in consolidation and would give significant pricing power to the bigger players. With consolidation taking place at the lower end of the industry also, the unviable units will be forced to shut down thus benefiting the long-term interests of the industry.
In addition to better pricing, volumes are also expected to remain robust and grow in the region of 8%-9% in the medium to long term. The housing sector, which drives almost 50% of the cement demand, is witnessing strong growth owing to very low cost of financing. The housing finance sector is growing at more than 30% per annum, which gives an indication regarding the growth in demand for dwelling units. The infrastructure sector, the second largest demand driver for cement, is also looking strong owing to government initiatives such as the National Highway Development Program and the Golden Quadrilateral Project, which aims at 25% concretization of the new highways. Besides, development of ports and airports will also help boost the demand for cement. Also, the per capita consumption of cement in the country at around 100 m tonnes is less than half of the world average and this in itself underlines the potential of the industry going forward.
Based on all the above factors, we believe that the sector has promising prospects going forward and the buying trend might well continue for some time to come. Further, we believe that staying invested in a cement stock from a medium to long-term perspective will accrue attractive returns. However, before investing it is important to find a good cement stock, one that has a consistent track record of outperforming peers and is operationally efficient. To know how to identify a good cement stock click here
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