The cement sector has been re-rated by the stock market in the recent past. The SI Cement index has appreciated by 22.9 per cent in the last three months against a five per cent decline in the past twelve months. Though this increase seems substantial, there is still some steam left in the rally.
What makes the industry attractive at the current prices is the fact that valuations are still beaten down to historic lows. Gujarat Ambuja fell from Rs 320 levels in June 1998 to Rs 180 levels in October 1998. From there the scrip has come up to the Rs 310 levels. The case is similar for other cement stocks like ACC, India Cements and Madras Cements.
One, the demand revival which has seen cement offtake rise 22 per cent to 16.2 million tonnes in April-May 1999 over previous period against an average six per cent growth in 1998-99. Two, prices have started moving up which is a major trend reversal and will reflect on bottom line growth in the current fiscal. Three, no major capacity additions are planned in the next two years to dampen the price rise.
A price rise in the pre-monsoon period seems suspiciously like an effort by producers to jack up prices during a relatively higher offtake period. However, analysts say this is not so and prices have started correcting after a massive decline and believe that there is still adequate potential for prices to rise. For example the in the southern markets, the price per bag was at an average of Rs 175 earlier last year from where it dropped to Rs 130 levels. Even after the price increase the price is in the range of Rs 150 per bag.
The price rise gains some significance as it is backed by signs of an economic recovery. Cement volumes are estimated to increase at 1.4 times the GDP growth rate. Removal of economic sanctions by the US also may see some infrastructure projects taking off which could lead to higher offtake for cement.
Moreover, the industry is the middle of a consolidation with medium and large players dominating the scene. A fewer number of players also means lower chances of regional price wars which could spoil the market.
The Smart Investor has identified three growth stocks in the sector.
Gujarat Ambuja Cements