Cement: Beating expectations

Over the last six months cement stocks have done rather well with the BS cement index up around 7.5 per cent compared with an upmove of around 4.6 per cent for the Sensex. Despite the Street’s anxiety that supplies would outstrip demand resulting in a fall in prices, nothing of the sort has happened as yet.

On the contrary, prices remain firm and have actually edged up in certain pockets by as much as Rs 20 per bag. Cement despatches for the industry were up nearly 10 per cent in March while for 2008-09, it was 8.3 per cent indicating that while the real estate sector may not be using much of the commodity, there is undoubtedly a lot of construction taking place across the country.

However, analysts continue to be circumspect pointing out that while around 7 million tonnes of capacity was added in the March 2009 quarter, over 20 million tonnes is expected in the first half of 2009-10. This supply, they suspect, could dampen prices as producers try to protect their market share.

They conclude that by the end of 2009-10 prices could start trending down as more capacity is commissioned and as new and smaller players look to establish themselves.The recent run up in prices has left stocks a little more expensive given that earnings could come off this year. At Rs 530, Ultratech trades at 7.5 times 2009-10 estimated earnings while at Rs 587, ACC trades at just over 10 times estimated 2009 earnings.