Cement makers' shares firm up on price hikes

Last Updated: Thu, Feb 07, 2013 15:04 hrs

Shares of India’s top cement companies gained strength and closed firm on Wednesday despite Morgan Stanley’s downward revision of target in its latest report on the sector. On a day when benchmark indices remained flat, counters of UltraTech, Ambuja and India Cements surged over two per cent.

Recent price hikes across the country have boosted sentiments. In the first week of February alone, rates of the construction commodity moved up around Rs 7-10 for a 50 kg bag. This has pushed the all-India average cement price to close to Rs 295 per bag.

Morgan Stanley downgraded Swiss major Holcim’s Indian group of companies — ACC and Ambuja — from overweight to equal weight. It reduced the targets for both the counters by 15 per cent and 12 per cent, respectively. UltraTech, India’s largest cement manufacturer, too, received the same treatment and the counter’s target price was cut to Rs 2,050 from Rs 2,325, down around 12 per cent.

Interestingly, these three companies collectively control capacity of around 110 million tonnes per annum, which is close to one-third of India’s overall cement market.

“Cement stocks under our coverage now trade at full valuations (9-9.5x one-year forward EV/Ebitda), in our view. More importantly, current multiples imply a peak premium of 22 per cent relative to the Sensex, leaving little room for multiples to expand,” the report stated.

The rally, which cement counters showcased for most part of CY2012, was subdued in the October-December quarter on the back of poor demand and price decline. However, over the last three weeks, prices, which are vital for the sector’s valuations, have started recovering and so have the stocks. Going forward, before monsoon sets in, industry analysts believe there would be further upside in prices.

“Cement prices have started recovering post mid-January. These price hikes are in line with our estimates for cement companies for the current financial year. Steeper price hikes from hereon can provide further upside for cement stocks,” says Teena Virmani, vice president, Kotak Securities.

Fund managers had showed renewed interest in cement counters last year. And the call played well. “Demand is a key now,” says Swati Kulkarni, executive vice president and fund manager at UTI Mutual Fund. “Supply is not likely to get added that easily (due to land and environment clearance issues) and hence, I think, profitability of the sector would remain strong. And from that perspective we are bullish on cement,” she adds.

Agrees Kaushik Dani, equity head at Peerless Mutual Fund. According to him, “Compared with mid-cap stocks, large cement counters are fairly valued. But having said that, there is scope for further appreciation in cement stocks from here on.”

Industry experts say government’s boost for infrastructure and upcoming state and general elections are likely to have favourable impact on the cement sector. Moreover, since setting up newer plants may take longer, they believe that from a three-year perspective, demand is likely to outpace supply, which would augur well for the sector.

On the BSE, shares of Aditya Birla group’s UltraTech closed at Rs 1,961.80, up 2.26 per cent while Ambuja traded last at Rs 205.55, up 1.98 per cent. North major Shree Cement hit its life-time high of Rs 4,800 in the initial part of the trading session.

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