Shares of cement companies are under pressure. Amid a weak market scenario, when benchmark stock indices lost 13 per cent from their recent peaks, these stocks have hugely underperformed.
For instance, shares of southern major India Cements dipped 33 per cent from recent peaks to Rs 79 on Thursday, while northern major Jaiprakash Associates saw erosion of around 30 per cent. Swiss major Holcim’s Indian companies, ACC and Ambuja, lost between 17 and 19 per cent of their share values after recent peaks in February.
Interestingly, in 2011, cement counters had not let investors’ money erode despite broader markets losing a fourth of values. They remained firm and surged further in line with the overall bull run during the first two months of calendar 2012.
“The movement in cement shares is a function of how prices of the building material move. Since March, average all-India cement prices have declined by Rs 10-15 for a 50-kg bag. This is reflecting in cement stocks,” says the executive vice-president of a domestic brokerage firm. She adds that fear of the Competition Commission of India imposing a penalty on cement companies (these have been probed on allegations of forming a cartel; the verdict is awaited) is also playing havoc with the counters.
During the March quarter, the price of a 50-kg bag had surged to an all-time high of Rs 310. However, so far in FY13, prices have slipped to Rs 295 on an average. “Prices are likely to fall further. Construction will slow down in the coming months, as the monsoon will hit the Indian sub-continent in another two to three weeks,” explains the research head of a Mumbai-based brokerage house.
In April, the cement industry’s sales growth hit a six-month low at 6.24 per cent (year-on-year). On a month-on-month basis, the situation is more severe, as sales declined by close to 14 per cent. Shortage of sand is being blamed for lesser construction activity, which led to slower cement offtake in April. The northern markets and Andhra Pradesh in the south were the most hit due to shortage of sand.
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Many research agencies had cut earlier projections of eight to nine per cent growth in FY13 to seven-eight per cent. However, industry officials continue to paint a picture of a robust year. According to Shailendra Chouksey, wholetime director at JK Lakshmi Cement, “The industry is likely to show nine per cent growth in the current financial year.” His optimism is mainly based on the increased infrastructure investments by the government. Similarly, K C Birla, chief financial officer of the country’s largest cement maker, UltraTech Cement, is also hopeful for an eight per cent growth in FY13.
According to analysts, cement stocks do not make for a buy at this time. However, they add, if investors have a horizon of at least six months from now, the sector can be entered gradually as more corrections set in. The overall annual output capacity is 330 million tonnes. In 2011-12, the industry had grown 6.4 per cent, higher than its initial estimates of around six per cent.