Rising demand, prices boost cement shares

Shares in cement companies are witnessing renewed buying interest on strong growth in demand and prices of cement. Analysts are expecting the demand growth to continue and the prices to remain at current levels.

Reports of a 10.8 per cent surge in cement despatches during February resulted in aggressive buying at frontline cement counters, such as Gujarat Ambuja, ACC, Grasim, Larsen & Toubro (L&T), and select second-rung counters in Monday's trading.

Cement despatches in February shot up by 10.8 per cent year on year to 10.3 million tonne, the highest in the current financial year to March.

Frontline shares Grasim and L&T hit their all-time highs of Rs 1,233 and Rs 613.50, respectively, on the Bombay Stock Exchange (BSE).

Shares in Gujarat Ambuja gained 2.71 per cent to end at Rs 322.50, while ACC shares went up by 1.57 per cent to close at Rs 277.35.

Second-rung shares witnessed big gains. Mangalam Cement shares rocketed by 8 per cent to Rs 14.69, Birla Corporation shot up by 7.07 per cent to end at Rs 64.34, Century Textiles appreciated by 5.69 per cent to close Rs 111.50 and India Cements gained 3.3 per cent to close at Rs 39.90.

During the month to March 5, 2004, the combined market capitalisation of fourteen north-based cement manufacturers has increased by nearly 6 per cent to Rs 11,989 crore.

A fund manager with a domestic mutual fund said, "The cement sector looks good on the back of strong demand and the recent price hikes by firms across the country. Clearly, this is one of the sectors which is still expected to give good returns even from the current levels."

However, an analyst with a domestic brokerage said domestic frontline companies are currently quoting at P/E multiples in the range of 20-30 times their expected earnings for the current financial year, compared with 10-14 times discount that global cement companies are currently quoting at.

"Going forward, I expect the cement company shares to underperform the Sensex by 12-15 per cent over a one year period."

While most cement analysts are confident that the current rise in the cement prices will sustain through the year, a few analysts have firmly ruled out any further substantial hikes.

"We expect the demand-supply imbalance of approximately 20 million tonne for the financial year 2004-05 to act as a major barrier to sustain any further rise in prices contemplated by the industry," an analyst with Cholamadalam Securities said in a recent sector outlook.

Meanwhile, foreign institutional investor (FIIs) have been aggressive buyers in frontline counters during the quarter ended December 31, 2003, even as domestic mutual funds booked profits.

Recently, the FIIs hiked their holding in ACC to the maximum permissible 24 per cent as on December 31, 2003, compared with 21.95 per cent as on September 30, 2003.

In Grasim, the foreign investors raised their stake from 16.8 per cent to 19.53 per cent, while in GACL and L&T, they have hiked their holdings to 20.9 and 13.44 per cent respectively, nearly three percentage points higher than those in the last quarter.