Cement despatches: Back in double-digits

Healthy demand outlook and partial improvement in prices have perked up sentiment towards cement stocks.

If the figures of India’s major cement companies are anything to go by, the sector is once again set for a double-digit growth in despatch volumes. While total monthly despatch volumes had grown between 10 per cent and 18 per cent during April to August 2009, factors like monsoons had slowed down growth rates to 6-9 per cent during September and November.

However, on the back of government-led infrastructure spending and recovery in the housing construction segment, the demand for cement has improved further. Seven companies, which account for a little less than half the total domestic capacity and which have announced their numbers so far, have reported a 13 per cent year-on-year rise in combined monthly cement dispatches to 9.61 million tonnes. In November 2009, their combined volumes were up 12 per cent to 8.5 million tonnes.

Notably, except for ACC and Ambuja Cement, all other players reported good growth in December. Among other big players, Shree Cements (volumes up 22.4 per cent) and Jaiprakash Associates (up 60.6 per cent) recorded superior growth aided by new capacities commissioned recently.

For the December 2009 quarter, despatch volumes of the seven companies were up a little over 10 per cent. With ACC recently commissioning two plants with a combined capacity of 2.8 million tonnes, and Ambuja Cement and Jaiprakash’s new capacities expected to go on stream in March 2010 quarter, expect improvement in their despatch volumes.

While the concerns regarding oversupply (due to planned new capacities) remain, the situation hasn’t turned for the worse so far. In a report dated January 6, ICICI Securities’ (I-Sec) analysts say, “Many of the capacity additions have been delayed/staggered, while newer capacities are taking time to stabilise.”

With India’s GDP expected to grow at 7-8 per cent, cement demand is seen increasing 8-12 per cent annually in the medium-to-long term. I-Sec’s analysts expect supply to be managed, demand to regain strength, thereby reducing demand-supply mismatch.

Meanwhile, the declining trend in cement prices seen across the country during October and November has also reversed partially in December helped by factors like shortage of rail wagons, healthy demand and the disturbed situation in Andhra Pradesh. Overall, the all-India average prices are estimated to be lower by 2 per cent year-on-year in December 2009 quarter (down 5 per cent sequentially). However, with healthy volumes and costs under control, most cement companies are reporting an improvement in operating margins and robust net profit growth in December quarter.

Going ahead, analysts at LKP Securities expect a dip of 3 per cent in average all-India cement prices in CY2010 (maximum pressure to be in South and North), and an increase of 2 per cent in CY2011. But, relatively higher input costs could lead to some pressure on margins.

Overall, the improved sentiments have helped cement stocks outperform the broader markets over the last one month. At current levels, valuations are not cheap. Thus, analysts are neutral to positive on the sector and recommend being selective.