When the Competition Commission of India (CCI) slapped cement majors with a penalty of Rs 6,700 crore on charges of cartelisation, barring a few cement counters, none recorded a knee-jerk reaction. This surprised analysts who had anticipated a fall in the prices of these stocks.
Soon, a joke started doing the rounds among industry experts: “There is cartelisation among cement stocks, too.”
Analysts have not yet been able to pin-point the factor holding up cement counters, irrespective of consistent negative news for the sector. Many had earlier advised investors to stay away from the sector. In their outlooks in the last few years, most cement majors never missed stating margin pressure, over-capacity and pressure on prices. Despite these, shares of cement companies continued their northward journey.
| GAINING STRENGTH | |||
| Companies | 30 Dec,’11 | 22 Aug, ’11 | YTD gain (%) |
| JK Lakshmi | 37.1 | 95.8 | 158.0 |
| JK Cement | 100.1 | 213.0 | 113.0 |
| Madras Cements | 102.5 | 182.0 | 78.0 |
| Shree Cement | 2167.4 | 3259.6 | 50.0 |
| UltraTech | 1160.5 | 1737.0 | 50.0 |
| India Cements | 66.0 | 88.6 | 34.0 |
| Ambuja | 155.4 | 193.4 | 24.5 |
| ACC | 1136.4 | 1369.0 | 20.5 |
| Sensex* | 15454.9 | 17846.9 | 15.5 |
| * Points; Figures in Rs /share Source : BSE | |||
Consider this: The year-to-date return from benchmark indices stands at 15 per cent, while the appreciation in stocks of cement majors ranges from 20 per cent to a whopping 150 per cent. At a time when the Holcim Group of companies—ACC and Ambuja Cements—gave investors returns of 20-25 per cent, shares of Aditya Birla group’s UltraTech are touching new highs, rising about 50 per cent during the period. Shares of South-based Madras Cements rose 77 per cent, while those of JK Cement and JK Lakshmi Cement rose 113 per cent and 158 per cent, respectively.
So, what’s making cement stocks gainers in a weak market? Large cash reserves with cement makers is a positive, say market players. “Profitability of cement companies is quite decent. Capacity creation in India is very difficult, as there is no land and no limestone deposits. We do not think capacity additions would be as aggressive as in the past. Probably, it would be slower than demand growth,” said the equity head of a large fund house.
Industry executives agree. Land acquisition, environment clearances, poor demand and inadequate supply of raw materials like limestone, coal and fly ash may hamper expansion plans, they say. This would mean cement makers would be able to continue with their pricing power in the coming years.
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A chief investment officer at a foreign fund house said, “The sector’s fundamentals are strong. Expansion plans of cement companies are almost complete; they are getting de-leveraged, but still generating healthy cash flows. They have put in so much money in capital expenditure that now, they can easily survive for three to five years without expanding further.”
During the 2007-2012 period, cement companies added about 150 million tonnes of fresh capacity, raising total capacity to 330 mt, ten per cent more than the targeted 300 mt. The first few years of this period saw cement makers record huge profits, which were utilised for rapid expansion.