Cement stocks outperform markets

While large-cap scrips have rallied 8-16% so far this year, mid-cap ones have gained 10-26%

Cement stocks have started the year on a firm note, with most outperforming the markets on hope of an improvement in sales and a pick-up in construction activity.

While large-cap stocks such as UltraTech Cement, ACC, Ambuja Cements and Shree Cement have rallied 8-16 per cent on the BSE this year, against a five per cent rise in the benchmark Sensex, mid-cap stocks such as Prism Cement, Heidelberg Cement India, OCL India, Birla Corporation and India Cements have gained 10-26 per cent.

“We have seen a rise in cement prices across India post December. As a result, cement stocks gathered momentum. Going ahead, we remain positive on the sector from a one-year horizon. There is a lot of capacity in place, which augurs well if the demand increases on the back of an improvement in the overall economy. We continue to favour Mangalam Cement and have a ‘buy’ recommendation on the counter,” said Sunil Jain, vice-president (equity research), Nirmal Bang.

In seven of the past 10 years, the sector outperformed the broader markets in the January-March quarter, owing to retail price increases, prominent in the peak construction season, reports suggest.

Between January and March last year, the UltraTech Cement, Shree Cement, ACC, Prism Cement, JK Cement and JK Lakshmi Cement stocks had gained 25-40 per cent, according to data compiled by Business Standard Research Bureau. During the same period, the Sensex gained 5.7 per cent.

Demand dynamics
After a decline in October 2014 due to the festive season and unavailability of labour, cement demand started recovering from November, led by a revival in construction. With an uptick in prices and an improvement in demand, analysts remain positive on the sector from a long-term perspective.

In the quarter ended December 2014, cement prices fell Rs 10-15 a bag in north India due to weak demand, non-availability of labour and the festive season.

In the south, prices were hit by monsoons and Cyclone Hudhud, reports suggest. Average prices in south India fell Rs 5-10 a bag. While prices fell Rs 10-12 a bag in western India, prices in the eastern parts of the country largely remained flat.

Analysts expect demand to improve, led by increased spending on housing in rural and semi-urban areas and an improvement in orders for infrastructure projects.

Given the demand triggers through the next two-three years (led by government investments), Mihir Jhaveri and Prateek Kumar of Religare Institutional Research expect prices to remain buoyant.

They maintain a positive outlook on the sector, estimating compounded annual growth of 9-10 per cent in demand during FY14-FY17.

Any weakness due to a moderate third quarter of FY15 should be used as an opportunity to accumulate cement stocks, they said in a recent report.

Tina Virmani, an analyst tracking the sector at Kotak Securities, however, says though cement stocks are trading at fair valuations, any weakness in these should be used to buy selectively. She continues to be positive on Grasim Industries and Shree Cements.