Cement companies' stocks outperform markets in 2016

Surge even as demand outlook remains uncertain; firms have expectations from govt's infra push

Shares of cement makers have been wealth creators for investors this year. While key stock indices have gained nearly 11 per cent in the year-to-date (YTD), cement shares rose between 24 per cent and 108 per cent. Even the recent Rs 6,700-crore fine by the Competition Commission of India (CCI) has not done much damage to the positive investor sentiment for the sector.

However, experts say the recent run-up has made valuations unsustainable, particularly as demand growth remains weak.

UltraTech Cement, part of the Aditya Birla Group, hit all-time highs after gaining 47 per cent this year. ACC and Ambuja Cements are up 24 per cent and 35 per cent, respectively. Regional and smaller entities Shree Cement, India Cements and Ramco Cements are up 40-60 per cent.

The calendar year began on a solid note as the 420 million tonne (mt) sector threw a positive surprise with growth of 11.5 per cent in the January-March quarter, the highest in four years. The average all-India price was Rs 276 for a 50-kg bag. Monthly consumption had hit an all-time high, crossing 25 mt. However, all pan-India companies could not report a good performance. ACC and Ambuja reported a dip of 4-4.5 per cent in their net profit; UltraTech managed a rise of 10 per cent.

In the April-June quarter, growth slipped to 5.7 per cent but the average price surged to Rs 289 for a bag. ACC and Ambuja reported a rise of 78 per cent in net profit; UltraTech's rose 29 per cent.

In July, latest month for which data is available, cement consumption growth was only 1.4 per cent, with monthly consumption in absolute terms declining to 23.3 mt. Prices were about the same in August. The heavy monsoon rain hit demand but that was not so with cement stocks.

Market experts have been betting on improvement in the infrastructure segment. Cement, being a proxy, came on the radar at the beginning of the year. Good rain and pay commission implementation have boosted confidence on demand. However, as a rule, growth in cement demand after a good monsoon comes with a lag of six to 12 months. Further, with droughts in 2014 and 2015, households might have postponed several of the other expenditures. A lot will depend on whether housing comes up as the top priority or is relegated to second or third in the list.

Meanwhile, as growth in the economy slowed to 7.1 per cent in the June quarter, cement consumption growth for the calendar year till July was 7.6 per cent. With current ongoing festive season, the cement growth estimate in FY17 is likely to be six to seven per cent. The all-India average price for a bag moved up from Rs 271 in January to Rs 291 in August, about 7.4 per cent.

Companies are hoping for government-backed infrastructure to take off and relate their growth with that of mega projects announced by the government. In its outlook after the June quarter results, ACC, whose realisations had taken a hit of three per cent, said, “Prospects of a good monsoon, coupled with the impetus from the government's thrust on infrastructure development, housing and other mega projects are also factors that are expected to have a positive impact on the overall momentum of construction activity in the coming quarters.”