Cement rallies on free pricing talk

Cement stocks such as ACC, Grasim and Gujarat Ambuja ended the day as top gainers, after the Finance Minister P Chidambaram's statement that there was no 'price freeze' in the cement sector and the government would not interfere with cement pricing.

Chidambaram's statement should alleviate investor concerns that manufacturers would not be able to raise the prices in 2008 in tune with market forces, according to a note by Edelweiss to its investors.

The cement scrips have been rallying since the last fortnight, gaining between 9 and 23 per cent. ACC, the largest cement producer in the country, gained by 11 per cent during the period from Rs 806.95 to Rs 898.10.

Grasim Industries rose by nearly 10 per cent from Rs 2,385.15 to Rs 2,623.50 and Gujarat Ambuja shot up by 13.67 per cent (Rs 110.05 to Rs 125.10) in the same period.

However, analysts consider these as minor tweakings. "The excellent despatch figures and expectation of no further intervention by the Government may be the reason for buying in cement stocks now," said J.Radhakrishnan, research analyst with India Infoline.

Cement prices had increased by Rs 3-5 per 50 kg bag in Kerala/Karnataka and by Rs 15-20 per 50 kg bag in Andhra Pradesh/Tamil Nadu in the first quarter of 2007-08.

"The demand for cement will continue to grow at 8-9 per cent CAGR (compounded annual growth rate) till the third quarter of 2007-08. said Hitesh Agrawal, analyst, Angel Broking.

Thereafter, the cement prices may come under pressure, only if there is a delay in profit realisation. Otherwise, the story is mostly over, especially for the overvalued large caps," said Hitesh Agrawal, analyst, Angel Broking.

Among the midcaps, south-based cement players led the pack with India Cement gaining by 19 per cent, up from Rs 173.25 a share on June 12 to Rs 206.20 on Thursday. Madras Cement gained by 17.6 per cent in the last fortnight.

The cement stocks had lost 3 to 12 per cent in May following the government's decision to withdraw the dual excise duty (Rs 350 a tonne for cement selling at or below Rs 190 per 50 kg bag and Rs 600 a tonne for cement selling above Rs 190) announced in the 2007-08 Budget and replace it with an ad-valorem duty of 12 per cent.

The cement companies had introduced price cuts ranging from Rs 3 to Rs 8 per 50 kg bag across most markets.

Analysts think the cement stocks have bottomed out, but do not see a positive trigger going forward. While inflation has come down to 4.28 per cent for the week ended June 9, monsoons have traditionally been the lean period for the cement industry.

"For the long-term investor, cement stocks do not hold value. Investors could be buying these stocks because they are cheaply available," said Agrawal.

ACC gained by nearly 9 per cent, with Grasim and Gujarat Ambuja adding 5 to 7 per cent. The highest gainer was India Cements, that closed at Rs 206.20 a share, up by 10.62 per cent from Wednesday.