Recent price hikes across the country have boosted sentiments. In the first week of February alone, rates of the building commodity moved up around Rs 7-10 for a 50 kg bag. This has pushed the all India average cement price to close to Rs 295 per bag.
Morgan Stanley downgraded Swiss major Holcim's Indian group of companies - ACC and Ambuja from over-weight to equal weight. It reduced the targets for both the counters by 15% and 12%, respectively. UltraTech, India's largest cement manufacturer, too received the same treatment and the counter's target price was cut to Rs 2,050 from Rs 2,325, down around 12%.
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Interestingly, these three companies collectively control capacity of around 110 million tonnes per annum - which is close to one-third of India's overall cement market.
"Cement stocks under our coverage now trade at full valuations (9-9.5x 1 year forward EV/Ebitda), in our view. More importantly, current multiples imply a peak premium of 22% relative to the Sensex, leaving little room for multiples to expand," the report stated.
The rally which cement counters show-cased for most part of the CY2012 was subdued in the October-December quarter on the back of poor demand and price decline. However, over the last three weeks prices, which are vital for sector's valuations, have started recovering and so the stocks. Going forward, before monsoon sets in, industry analysts believe there would be further upside in prices.
“Cement prices have started recovering post mid-January. These price hikes are in line with our estimates for cement companies for the current financial year. Steeper price hikes from here on can provide further upside for the cement stocks," says Teena Virmani, Vice President, Kotak Securities.
Fund managers had showed renewed interest in cement counters last year. And the call played well. "Demand is a key now," says Swati Kulkarni, executive vice president and fund manager at UTI Mutual Fund. "Supply is not likely to get added that easily (due to land and environment clearances issues) and hence I think profitability of the sector would remain strong. And from that perspective we are bullish on cement," she adds.
Agrees Kaushik Dani, equity head at Peerless Mutual Fund. According to him, "Compared with mid-cap stocks, large cement counters are fairly valued. But having said that, there is scope for further appreciation in cement stocks from here on."
Industry experts say that government's boost on infrastructure and upcoming state elections and general elections of 2014 are likely to have favourable impact on cement sector. Moreover, since setting up newer plants may take longer time, they believe that from the three years' perspective demand is likely to outpace the supply side which would augur well for the sector.
On the BSE, shares of Aditya Birla group's UltraTech closed at Rs 1,961.80, up 2.26% while Ambuja traded last at Rs 205.55, up 1.98%. North major Shree Cement hit its life-time high of Rs 4,800 in the initial part of the trading session.