Small cement stocks soar on GACL-Holcim deal

Small cement companies were on fire on Monday after Holcim announced plans to take over Gujarat Ambuja Cements.

Dealers said several small cement players were attractive targets for a take-over given the bullish outlook for the cement industry.

Holcim's India plans reflect how keen foreign companies are to make further inroads into the Indian markets.

Major gainers on Monday included Saurashtra Cement (up 4.9 per cent to Rs 48.2), Gujarat Sidhee Cement (up five per cent to Rs 15.34), Shree Digvijay Cement (up 4.98 per cent to Rs 197.1), Mangalam Cement (up 2.36 per cent to Rs 93.25), India Cements (up 4.79 per cent to Rs 127.9) and Madras Cement (up 0.47 per cent to Rs 1855) and Dalmia Cement (up 8.64 per cent to Rs 243.2).

Some stocks declined, like Shree Cement (down 4.16 per cent), Chettinad Cement (down 4.4 per cent) and Mysore Cement (down 2.33 per cent). However, most of these stocks have appreciated over the past one week and one month.

Holcim on Monday announced the acquisition of 14.8 per cent of promoters' stake in Gujarat Ambuja Cements (GACL).

According to estimates by Angel Broking, excluding the non compete fee, the price at which Holcim bought the stake in GACL works out to Rs 725 crore per million tonne.

This is high compared with similar valuations of other companies such as India Cements (Rs 450 crore), Madras Cement (Rs 490 crore) and ACC (Rs 600 crore) indicating that these stocks may see some re-rating.

Several smaller cement companies in the country are considered to be acquisition targets. There are certain others which may not be sold out but the high valuations for cement capacities may trigger a rally in these stocks.

This, combined with the bullish outlook for the sector on back of infrastructure development and expectations of firm cement prices, led to smaller stocks firming up.

"The Holcim announcement acted as a trigger for smaller cement stocks, which have upside potential on back of good future growth with rising demand and better pricing," said Rajen Shah, chief investment officer, Angel Broking.

HDFC Securities, head-retail research Deepak Jasani said, "It is clear from the price at which Holcim has acquired the stake in GACL that foreign buyers are showing greater interest in Indian cement companies and they are ready to pay more for getting a higher share in this market. Moreover, cement volumes are expected to be good going forward and pricing would remain favourable in certain regions."

Industry observers point out that there are rumours about companies such as Mangalam Cement, Mysore Cement, Saurashtra Cement and Gujarat Sidhee Cement getting into tie-ups or consolidating in some way. Cement prices in the southern markets have been stagnant for long.

With demand picking, cement prices are expected to firm up, thereby improving the profitability. Thus, they would command higher prices if they choose to sell off.

Shah adds that companies such as India Cements and Madras Cement have a good upside potential on the bourses and thus continue to attract investors' interest.

Technical analysts are also bullish about most cement stocks, including the bigger players like GACL and ACC. Thus, although stock prices may stabilise at a higher level, the long-term growth and consolidation story augurs well for the sector.