Path still unclear for cement stocks amid subdued pricing, weak demand

While capital expenditure by government should aid demand in March quarter, a meaningful demand revival is unlikely anytime soon

Investors have shied away from cement stocks in the past six months due to subdued pricing amid weak demand. The trend is unlikely to reverse soon.

Since July 2019, stocks of major cement companies, such as UltraTech Cement, ACC, and Ambuja Cement, among others, are down to 9 per cent in an otherwise bullish market (the BSE Sensex was up 4 per cent). Even Shree Cement is down by over 3 per cent.

Though recent ground-check reports by analysts offer some hope on cement pricing, sustaining the gains may not be easy.

Consider this: While average cement prices in December were down 1-3 per cent, month-on-month, analysts say some dealers have taken price hikes on a pan-Indian basis starting January 2020; others may follow suit.

A Reliance Securities report also states that dealers have been indicated by cement companies to prepare for a price hike of Rs 10-60 per bag (of 50 kilos) in January. Some sector experts believe the pricing action is an indicator of demand revival in the ongoing quarter.

What could also provide upward thrust to cement volumes is the government’s push to increase capital expenditure (capex) in the March 2020 quarter. Even historical trends are evident of higher capex disbursements by the government in the final quarter of the financial year. If revival continues, cement companies could get room to increase prices.

On the flip side, a few factors still question a sustainable demand revival and the pricing improvement. For instance, analysts at Centrum Broking said in their recent report, “Liquidity tightness and funding paucity for infrastructure projects, in combination with the weak organised retail housing demand, will spill over in 2020-21, keeping the pricing scenario under pressure.”

Cement stocks

Though expectations of higher utilisation of clinker capacity should support pricing, the jury is out on this. So far, benign fuel and power costs, along with lower corporate tax rates, have supported earnings of cement companies in the December quarter. But, how far this trend sustains is also questionable, given the rise in oil prices that have an indirect bearing on fuel and transportation costs.

Against this backdrop, investors are recommended to be selective till clear signs on the demand and pricing fronts emerge. That is despite many cement stocks trading at 20-35 per cent discount to their respective historical long-term average valuation. Among the lot, UltraTech Cement is analysts’ top pick in the large-cap cement space.