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Cement: Bottoming out?

Sep 21, 2001

The recent fall in the global markets has subdued sentiment on the bourses. The panic selling after the Tuesday's terrorist attack in light of a possible outbreak of a war and its consequent effect on global economy has resulted in benchmark indices plummeting to a new lows. Valuations have also fallen significantly and the cement scrips are no exception.

(Rs m) ACCGrasimGuj. AmbujaL&TMadras Cements
Market Price (Rs) 101 257 145 157 4,200
Book Value (Rs) 63 428 103 159 3,342
Number of shares (m) 170.9 72.3 147.2 249.0 1.2
EPS (FY02E) 9.7 67.6 13.5 17.0 539.6
P/E (x) 10.4 3.8 10.7 9.2 7.8
Price to book value (x) 1.6 0.6 1.4 1.0 1.3
Market Capitalisation 17,261 18,545 21,344 39,093 5,039
Sales (FY02E) 28,846 52,556 14,208 79,689 7,228
Net profit (FY02E) 1,655 4,885 2,088 4,240 653
Market cap/sales (x) 0.60 0.35 1.50 0.49 0.70

First, a brief look at the positives for the cement sector. The per capita consumption of cement in India is just 90 kgs as compared to a world average of 250 kgs. Housing sector continues to remain buoyant thanks to various incentives proposed in recent budgets. This combined with a fall in interest rates have also augurs well for the industry. Another important development in the current year is the government's aggressive stance towards the road network development program. Apart from the Golden Quadrilateral that aims at connecting the four metros of the country, improving rural connectivity is also on the cards. As a result, cement demand is expected to increase by 8% per annum and cement consumption is expected to touch 200 million tonnes (MT) by 2010 as against around 93 MT currently. If the government manages to push reform and eliminate structural issues, which have hindered growth till now, one could witness a sharp upturn in cement demand in coming years.

If one were to look at the production and consumption trend in the last one year, trend is volatile. 4QFY01 witnessed a sharp slump in cement demand and production on account of earthquake in Gujarat. Despite a fall in demand, prices have been on the rise since December 2000 thanks to the cartelisation of cement companies. Against a 8.3% fall of in cement prices in April-July 2000, cement prices have increased by 19.8% for the aforesaid period in the current year (average prices in the current year are Rs 181 per 50 kg as compared to Rs 151 per 50 kg last year). Though cement prices seem to have come off in recent months, on a year on year basis, per bag prices are on the higher side compared with last year's trend.

Coming to the valuations perspective, the combined market capitalisation to sales of the top 5 companies works out to just 0.55 times. Gujarat Ambuja is trading at a significant premium to its peers in light of its high efficiency standards. ACC is back in black and the company is expected to report sharp growth in profits on the back of a significant improvement in margins. Grasim is the cheapest cement scrip probably in light of the diversified nature of the company (the other divisions like viscose staple fibre and fabrics are witnessing slow down in demand). Madras Cements is trading at a lower P/E due to its predominantly southern region focus.

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