Cement stocks likely to remain bearish

Cement stocks are expected to track the benchmark indices next week, analysts and dealers said.

"Our market view for the next week or two is bearish, and we expect cement stocks to move in line. However, if there is a bounce back in the benchmark indices, we expect cement stocks to be among the first to respond and move up," said Sandeep Wagle, chief technical analyst with Angel Broking.

Wagle expects the Nifty to test 5,450 levels in 2-3 weeks. The market will become attractive again at this level.

Fundamental analysts, however, are not so optimistic about the sector's future.

Hitesh Agrawal, a fundamental analyst with Angel Broking who tracks the cement sector, is maintaining a 'neutral' view on the sector.

"We turned neutral on the sector after the FY08 (2007-08) budget, and have not changed our view since," he said. Agrawal's chief concern is the absence of pricing power and capacity additions coming up this year.

He estimates fresh capacity additions of about 60-65 million tonnes to come up in the next four to six quarters.

"This, coupled with lack of pricing power among cement manufacturers, is expected to slow down earnings growth, or may also result in some amount of de-growth," he said.

A reverse flow of exports, and the government's plan to step up cement imports is also adding to the players' worries.

He does not rule out possibility of a price correction in the second half (Oct-Mar) of 2008-09. Agrawal is "underweight" on the sector and advises investors to stay away from cement stocks.

Foreign brokerage house Macquarie Securities has a 'buy' call on Grasim Industries and Ambuja Cements, with a 12-month price target of Rs 4,500 and Rs 160, respectively.

"I am bullish on these companies due to their huge volume growth and cost savings. Apart from that, our outlook on the sector as a whole is in the neutral range," said Rakesh Arora, senior fundamental analyst at Macquarie.

He feels the sector's growth will be limited by the lack of pricing power and incremental capacity additions. "If at all, there is a small window between February and April, when cement companies can hike prices," he said.

"If at all there is a price hike, I expect it may be in the range of Rs 5-10 a bag," he added.

STOCK VIEW
Derivative analysts say while there was some open interest build-up in stocks like India Cements and UltraTech Cements, it was not significant enough to provide positive cues as yet.

According to Wagle of Angel Broking, chart readings for the next 2-3 weeks show support for Grasim at Rs 3,210 and strong resistance at Rs 3,525. ACC is showing support at Rs 770 and resistance at Rs 910. For Ambuja cements, support is seen at 129 and resistance at 138.

India Cements' support level is Rs 230 and resistance Rs 270. Support for UltraTech will come in at 850, while it shows strong resistance at 920, Wagle said. "My view is bearish," says Wagle.