Is there more fire left in cement stocks?

Experts say selective counters have potential for more concrete gains not all

Cement stocks have been scaling new highs recently. Whether it is Aditya Birla group's UltraTech or Swiss major Holcim-owned Ambuja, counters are trading at all time high.

In year-to-date (YTD) scenario, against gains of 20-25% in benchmark indices, shares of cement companies have drastically outperformed the broader markets with some counters gaining as much as a whopping 200% in a matter of nine months. The rally on the counters has been quite consistent and a steady one.

Interesting point is that it's all happening amid prevailing negative factors for the sector - be it the issue of over-capacity or the hefty penalty of Rs 6,700 crore by the Competition Commission of India (CCI) in the first quarter of FY13.

Many investors kept shying away from cement as an investment avenue given the uncertain outlook for the sector as a whole. But shares kept on inching higher and higher.

So, can one get into these counters which already had a steep run?

Sector's experts feel that still more fire is left in cement stocks. But they are quick to add that selective companies need to be looked at - whether in the large cap or mid cap space.

Ambareesh Baliga, independent markets analyst, says, "Prices of imported coal have softened but cement prices have not declined much. Going ahead with reform measures if infrastructure boom follows then it will benefit the sector as cement offtake will be higher. Cement stocks have been outperforming the markets for a long time. I suspect whether such an outperformance will continue. However, there are stocks like UltraTech and Shree Cement which still have potential to rise further."

Teena Virmani, vice president (equity research) at Kotak Securities, said in a note, "We believe going ahead cement prices may remain strong with revival in the construction activity across various infrastructure and real estate projects and companies would continue to pass on the increased costs to the end users. We would thus be selective in the sector and would prefer companies having good volume growth going forward and attractive valuations."

According to analysts, one should avoid companies which have larger presence in the southern part of the country. They say that players with high exposure in the north, west and east can still turn out to be good buys at current levels from the short-term perspective.

Research head of a Mumbai-based brokerage house, says, "Peak construction period is yet to start. Cement companies have been able to maintain the prices at around Rs 300 for a 50 kg bag for long now. Going forward it will help them post better bottomline growth." According to him shares of Ambuja Cements, UltraTech and JK Cement could still go higher. For that matter, even Shree Cement can inch up higher, he adds.

Kaushik Dani, equity head at Peerless Mutual Fund, says, "Sales volume for the industry has been healthy and CCI's penalty too has taken a back seat for the time being. Already counters had a good run and from here on, fundamentals would have to be looked into."

Barring the South, all other key cement markets - north and west are witnessing rise in capacity utilisation. For instance, north is likely to see utilisation in FY13 at around 90% against 85% in FY12 while in the western market it may go up to 91% against 83% last year.