Cement: Robust volumes

Healthy demand from housing and infrastructure sectors may aid demand, but concerns over near-term pricing exist.

The country’s leading cement players reported robust growth in despatches in March, suggesting that the industry may record sales in excess of 20 million tonnes (mt) for the last month of financial year 2009-10.

On the back of strong demand from housing and infrastructure sectors and easing supply constraints (due to improvement in availability of rail wagons), the combined cement despatches for ACC, Ambuja Cements, Aditya Birla group, Shree Cement and JP Associates (which together control about half the market) stood at 9.85 mt in March. While this is the highest (combined despatches) in more than six months, it represents a growth of almost 13 per cent year-on-year.

Among individual companies, only ACC’s despatches declined (down 3.5 per cent year-on-year to 1.94 mt) in March. In fact, in five of the last six months, the company has reported a year-on-year decline in despatches.

All other companies did reasonably well. Ambuja Cements reported a growth of over 11 per cent, helped by commissioning of its 1.5-mt-per-annum Dadri plant. While the Aditya Birla group and Shree Cement saw despatches rise 9.7-10.8 per cent, Jaiprakash Associates’ despatches rose 75 per cent to 1.37 mt, aided by new capacities.

Considering that so far, cement companies have been able to pass on the increase in costs to customers, the growth in despatches indicates the demand continues to be healthy. According to an ICICI Securities report, cement prices are ruling higher by Rs 40-90 per bag (50 kg) from the lows of December 2009 and have recovered all losses since July 2009. This includes the price increase of Rs 2-20 a bag in April 2010. Since oversupply concerns haven’t played out as expected, helped by delays in new capacities coming onboard, cement companies have a better control on prices. All these have helped the sector outperform the broader markets since the end of 2009.

Analysts believe that most leading cement companies will sustain operating margins for the March quarter on the back of a 10-15 per cent rise in sales. Says a report by Kim Eng Research, “For 2010-11, we expect demand to rise by 12 per cent to 225 mt.”

However, concerns pertaining to near-term pricing continue on the back of new capacities becoming operational (from May 2010 onwards), as well as some demand weakness due to monsoon. Unless these are overcome by the higher-than-expected demand, the sector may underperform the broader markets. Hence, analysts advise being selective while picking stocks. In particular, most analysts prefer Grasim due to its relatively lower valuations and good outlook for the viscose staple fibre business. Analysts also seem bullish on Ambuja Cements and Shree Cement.