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What next for cement stocks?

Dec 7, 2010

The July-September quarter was the worst for the cement industry in the recent down cycle. Sales were unimpressive. Profits fell sharply. Every variable played spoil-sport.

The extended monsoons dampened demand as construction activity remained poor. Despatches were further curtailed by unavailability of wagons and shortage of labour. Overhang of excess capacity reduced realizations. Correspondingly, an upsurge in raw material prices hindered profitability.

The October-December quarter is expected to bring some relief. The month of October witnessed a sharp rebound in production and despatches. This is a normal trend after a dull monsoon season. Cement realizations also improved significantly. Fear of price hikes led dealers to build-up their inventory.

However, construction activity remained subdued. The effects of this spilled over in November. The month saw both despatches falling and cement prices softening. This was mainly because demand for Government and real estate projects did not pick up. The festive season created shortage of labour.

And the unseasonal rains made matters only worse. Some improvement is expected in December on the logistical front. The demand may improve marginally. But it may take a few quarters before the supply overhang goes.

Cement consumption is closely tied to the overall growth and well-being of the macro-economy. India’s robust GDP growth translates well for the commodity. But a robust GDP growth rate cannot sustain without the appropriate infrastructure in place.

Hence, the government continues to emphasize the same. It has already spelled out plans to double the infrastructure spending to $1 trillion in the 12th five year plan starting FY12. This means demand for cement will remain strong.

Also, India lags far behind the world average in terms of per capita cement consumption. It is 7 times lower than that of China. This underlines the tremendous scope for growth in the long term. So, the long term remains intact for the sector. However, there may be some challenges in the short to medium term.

And therein may hide an opportunity for a seeker of value in cement stocks. As of now, sector stocks appear to be fairly if not richly valued. But a couple of quarters of pain and stock prices could come under pressure. Taking into account the market’s tendency to overshoot in both directions, a watchful investor may just be able to scoop up good value from a cement stock from a long term perspective. In other words, a correction that is greater than what is warranted could actually be a boon in disguise.

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4 Responses to "What next for cement stocks?"

rk77

Jan 2, 2011

Manglam cement recommended by you has lost value instead of any appreciation. The grim scenario of cement painted by you above does not help those who bought this stock on your recommendation. There is a distinct need for you to improve the content of the newsletter.

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sm

Dec 13, 2010

I agree, totally waste article.

Like 

HNK

Dec 8, 2010

I also agree. In spite of paying fees, we are getting general articles which is available on web as free. We are expecting some genuine and useful article which can help to grow our wealth. Please focus on more technical instead of focusing on advertisement to capture customer like me.

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DPM

Dec 7, 2010

Too general and vague an article. Such articles are dime a dozen in various media and waste of precious time. Not upto the standards of Equitymaster.com. We, the paid subscribers expect much better report/articles. Nowhere any estimates of profitability or share prices etc.

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Equitymaster requests your view! Post a comment on "What next for cement stocks?". Click here!

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