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Cement: A winner

Dec 15, 2000

The last two months marked a turnaround in investor perception towards cement stocks. Indeed, most cement companies recorded an impressive performance on the bourses during this period. This change in sentiment was supported by the view that the cement sector was finally coming out of a trough.

Cement stocks stage a comeback
Company16-Oct-0014-Dec-00% change
ACC 86.6 165.8 91.6%
Grasim 176.2 287.0 62.9%
Madras Cements 3,825.0 5,199.2 35.9%
L&T 160.6 210.2 30.9%
Guj Ambuja 139.0 166.8 20.0%
BSE Sensex 3,728.7 4,270.5 14.5%

From the table it is very apparent that cement stocks have performed better than the market as a whole. Some, like ACC and Grasim have recorded a significantly higher growth in their market values. Others too, including Madras Cements and Larsen & Toubro, have logged in large gains.

Although the reason that the upturn was ticked off by an improved industry environment, there are several other technical reasons, which must be factored in. First, cement stocks, hit by a regional drought and floods, had been hammered down earlier this fiscal, thus making valuations attractive. Second, with interest surrounding technology stocks waning, investors were compelled to look at other sectors i.e. old economy stocks. Both these factors, ofcourse coupled with a fundamental improvement in business environment, have contributed to the rally witnessed over the past two months.

What will drive these stocks going forward? Earnings, for one. Cement stocks have witnessed sharp erosion in earnings over the last two quarters, and another disappointment could suppress the interest surrounding the sector. Another factor keenly watched by the investing community will be the growth in dispatches, which were badly hit in the first half of this fiscal. Any pick up in consolidation activity too will reflect positively on the sector, which despite an improving demand supply equation has been unable to improve its margins (off late, however, they seem to have adopted collusion as a measure to protect margins).

Cement stocks have had a dream run on the bourses. Now its time for the companies to declare the numbers that underscore the rationale for the run up.

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