Cement stocks: Monsoon blues

Demand remains strong but a weak monsoon could change the dynamics of the marketplace.

Contrary to expectations that incremental supply may not find enough demand, August has seen strong despatches of cement. Despatches for the top eight players, which account for just under 50 per cent of the total supply of around 204 million tonnes, grew a remarkable 23 per cent year-on-year. Of course, a part of this is due to the low-base effect because in August last year, the growth was just under 4 per cent.

Nevertheless, the demand has been steady, probably because monsoons were delayed and so construction activity could take place for a longer period during the month. However, a less-than-normal monsoon could mean less purchasing power in some markets in rural areas, the same markets that had seen strong demand in the past few quarters. That is probably why after a smart run between March and early August, during which it rose some 84 per cent, the BSRB Cement Index has lost steam. As a result, the index has underperformed the Sensex between March and now, gaining just 62 per cent to Sensex’s 80 per cent.

Demand has been fairly robust in northern and eastern regions but less so in the south, where consumption in key markets like Andhra Pradesh, which is believed to have received less-than-normal rainfall, are a cause for concern. Interestingly, cement prices weren’t hurt during the last couple of monsoons, though things could be different this time. Prices, say industry watchers, have come off in some pockets in the south and have softened in a couple of other states, such as Rajasthan and Madhya Pradesh. Analysts believe cement stocks should now be bought only at much lower prices. At the current price of Rs 742, Ultratech trades at a price to earnings multiple of 9.5 times estimated 2009-10 earnings. At Rs 807, ACC trades at 13.7 times 2009 estimated earnings, while at Rs 100, Ambuja Cements trades at about 13.5 times estimated 2009 earnings. At Rs 2,608, Grasim is far cheaper at just under 10 times 2009-10 earnings.