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How should one analyse the cement sector? We can talk about Monsoon seasonality (construction slow down period), India's top producer ranking in the Cement market (after China), correlation with GDP and housing sector (more than 60% of the total consumption), government control with coal and limestone reserves, power supply, etc.
The above variables are from the stock market domain but join a global cement conference and the variables acquire another colour. The focus shifts to efficiency. The bottom line shifts from seasonalities and earnings to shortage of global slag and the abundant but low quality Chinese granulated slag.
The research gets technical with ideas like 'grinding optimisation, 'electricity', 'energy efficiency', 'energy audits', 'super conditioning' and how corrosion in a cement plant can cost up to $500,000 per year.
Then there are other non-popular variables which take us from the popular micro intra-sector analysis to the macro inter-sector analysis. How are local cement stocks fairing in performance vs. global cement stocks? Should it matter? The Swiss global cement major Holcim owns 30% of Indian cement sector (ACC and Ambuja). What's the correlation of cement stocks with the Indian realty components? If interest rates drive real estate, economy is inflationary and commodities and fuel drives cement, what is the cement outlook?
The point I am making here is that there will always be more available data (or possibility of generating new data) that analyst(s) and (or) experts can process. Though probability teaches us to dig into a universal urn of multi-coloured balls, making a selection and estimating how the urn components looks like, but in reality we chose to improvise our own urns.
We already know what kind of mix (coloured balls) the urns contain. So it's like taking a quiz after you have already looked at the answers. On one side we assume to be in the age of big data analytics and on the other side, we use ‘Ceteris paribus’ as our age old alibi. We chose to draw a line, oversimplify to keep discomforting extraneous variables out.
This is why the missing accountability in analysis. We are served what we seek. Psychologically we seek stories more than statistics. So here we have top stock pickers, market benchmark forecasting gurus, inter market sector experts, but nothing like ‘all in one’. Why can't our current research systems tell us about the top equity region (assuming India), and then the top sector from the region (assuming cement) and then inside cement the top stock (say India Cement). Why can’t we objectify subjectivity? Because, it is hard to be a data-miner, statistician, economist, historian, psychologist, all in one.
Does this ill-equipped approach cost us dearly? Do we fail to simulate the "what if scenario"? When Oil can be replaced by alternatives and food can be replaced by tablets (ok! not yet), then what is so religious above alternative cement or alternative research for that matter. Alternative cement is already out there, C-Fix, SlagStar, RockTron, Eco-Cement, CSA cements, CemStar, Cenin, Celitement, etc. And considering the rising fuel (a key cement ingredient) is not a "What if Scenario for us", cement alternatives could be closer than comfort.
For us at Orpheus every data point is destined to go through an outlier and reversion experience. Irrespective of whatever urn you chose the “best data” moves down and vice versa. Orpheus performance cycles, ranking structures, data-mining work for sectors, benchmarks, stocks and everything organic and alive. Barring Birla Corp and India Cements, all the rest of the Indian cement components are above 50%ile Jiseki quarterly performance ranking i.e. expensive.
Now this is contrary to conventional belief that a good housing, real estate, housing and infrastructure sector should benefit the cement sector growth this year. For us at Orpheus, the correlations are not that obvious, we see cement components heading lower and underperforming while we remain positive on the real estate sector.
Unlike cement sector, the realty sector has most components undervalued on Jiseki performance rankings. Barring Sobha Developers, which is nearing 80% quarterly Jiseki rankings, rest of the realty sector is still inexpensive (low performance rankings). This includes the like of DLF, Housing Development (HDIL), Unitech, Ansal Properties, Indiabulls Real Estate, etc. Even the global cement major Holcim can't be considered inexpensive and is currently in a Jiseki sell mode. The cement story for us is inverted; it is ‘Long Realty, Short Cement’.
The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm
