Sensex Continues Downtrend; Capital Goods Stocks Witness Selling

Thu, 14 Dec 01:30 pm

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Stock markets in India are presently trading marginally lower. Sectoral indices are trading on a negative note with stocks in the power sector and capital goods sector witnessing maximum selling pressure.

The BSE Sensex is trading down 74 points (down 0.2%) and the NSE Nifty is trading down 26 points (down 0.3%). The BSE Mid Cap index is trading down by 0.4%, while the BSE Small Cap index is trading down by 0.9%. The rupee is trading at 64.28 to the US dollar.

In the news from macroeconomic front, market participants are tracking the second phase of polls for Gujarat elections today.

The first phase of the Gujarat Assembly Elections 2017 took place on Saturday, 9 Dec 2017. 89 of the total 182 constituencies in Gujarat went to polls in the first phase of this high-decibel, high-stakes state election. As per news reports, the voter turnout was around 68%.

The final outcome of the elections will be declared on 18th December.

The outcome is decidedly important for the Indian stock markets. As Ankit writes in one his editions of Equitymaster Insider..."stock market valuations in India seem to reflect what I call the 'Modi market premium'". You can read his entire note on this topic here (subscription required).

Let's wait and watch how the result of this elections turn out. We'll keep a close watch on the developments in this space and keep you updated.

In other news, as per an article in the Economic Times, the Supreme Court yesterday permitted the Centre to modify the notification banning use of pet coke and furnace oil in Uttar Pradesh, Rajasthan and Haryana for industries like cement, lime stone and thermal power plants.

The apex court also directed the Ministry of Environment and Forest (MoEF) to come out with regulations for the sale of pet coke and fix emission standards for thermal power plants.

Petcoke is a dirtier alternative to coal which had temporarily been banned as pollution levels shot up in Delhi last month.

India is the world's biggest consumer of petroleum coke, better known as petcoke, a dark solid carbon material that emits 11% more greenhouse gas than coal.

The above development will come as a welcome breather for cement companies.

Speaking of cement companies, UltraTech Cement is setting up a 3.5-million-tonne greenfield cement plant at Pali in Rajasthan for Rs 18.5 billion.

This is the second greenfield project by the cement maker this year as it looks to capitalize on the government's focus on infrastructure and affordable housing.

Further, this plant is being set up in one of the fastest growing markets in the country and the highest cement consuming State in the North Zone. It will cater to the markets in Western Rajasthan where UltraTech does not have a significant presence.

With this expansion UltraTech will have a foot print across the country with 50 plant locations, along with 103 ready-mix concrete plants.

Earlier, the company had announced the setting up of a 3.5-million-tonne integrated cement plant at Dhar, Madhya Pradesh at a total cost of around Rs 26 billion.

Meanwhile, the Board of the company also approved a proposal for an increase in the investment limits by Registered Foreign Portfolio Investors (RFPIs) including Foreign Institutional Investors (FIIs).

The approval would result in raising the limit from the existing 30% of the paid-up equity share capital up to 40% of the paid-up equity share capital of the Cement major.

Note that cement companies in India are presently trading at expensive valuations. If one were to go by the numbers as reported by Business Standard, the valuations of the Indian cement companies are obscenely expensive.

Globally, cement makers are valued at 26x their latest annual earnings and 1.6x times their latest book value. The corresponding ratio for Chinese players is 23x and 0.95x respectively. On the other hand, Indian cement makers are valued at 48 times their net profit in the last financial year.

Also, the consolidation in the sector has weakened the balance sheet of top cement companies in India. The net debt-to-equity ratio of the 26 companies rated by Crisil is likely to increase to 2.9 times in 2018 as compared to 1.5 in 2017. Further, debt funded 78% of the acquisition cost in FY17. This is evident in the chart below:

Cement Companies Increasing Leverage

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