Cement firms' shares up 10-20% in a month

With onset of monsoon and government's focus on infrastructure, cement stocks have beaten Sensex

There has been a surge in cement stocks over the past month. Owing to the monsoon’s onset and the government’s focus on infrastructure development, a majority of companies in the segment have gained between 10 and 20 per cent on stock exchanges. In comparison, the benchmark Sensex gained seven per cent.

Cement stocks, considered a proxy measure for infrastructure development, have been on the radar of investors for more than a quarter. After better than expected performance in the March quarter, the preference for cement stocks is on the rise.

Shares of ACC and Ambuja Cements, part of Swiss giant Holcim, have gained 11 per cent and 17 per cent, respectively. Those of Shree Cement, India Cements, Ramco Cement, JK Lakshmi Cement and HeidelbergCement have risen between 10 and 22 per cent.

Financial research reports have suggested the dark tunnel for the cement cycle will soon be ending, as demand has shown initial signs of a pick-up, though pricing remains a concern. A better than normal forecast for monsoon rains in 2016 had aided cement stocks. Generally, positive impact on demand due to good rains come with a lag effect of four to six months from rural and semi-urban regions.

According to a report by brokers Prabhudas Lilladher, “The forecast of a better monsoon, benefits from structural reforms undertaken by the government and elevated spending would provide strong impetus for a spurt in demand in the (financial year’s) second half. This, with low capacity addition, would drive the strong earnings growth.”

“The industry’s March quarter performance was strong, exceeding our estimates on the operating front, mainly on account of better than expected demand growth and substantial reduction in operating costs. The demand environment improved strongly, barring a few pockets, mainly on account of the increased pace of infrastructure development. We note that most of the companies have seen a decent spike in non-trade sales,” says a note from Reliance Securities on the sector.

In the past six quarters, it was the first time the sector showed double-digit growth, of 11.5 per cent. This happened with a rise in construction activities, especially in the infrastructure and housing sectors. Monthly cement consumption hit an all-time high of over 25 million tonnes.

UltraTech Cement, biggest in the sector, said demand was expected to grow by seven to eight per cent for next year, on the back of the government's focus on infrastructure development, housing and 'smart' cities.