While demand appears to be strong, additional supply could keep prices under pressure.
June has been yet another good month for the cement industry with despatches up a strong 13 per cent year-on-year. Not surprisingly, cement stocks have been resilient and the BSRB Cement Index has been an outperformer for some time now — against the Sensex’s gain of 40 per cent since the start of the year.
The index has risen nearly 60 per cent. With rising despatches in the June 2009 quarter, cement firms are expected to turn in higher margins that should boost earnings.
A part of the reason for the strong growth in June is a low base effect, but it’s also true that demand has been particularly good in northern and eastern regions. The story has been somewhat different in southern part of the country.
In May, for instance, consumption in key southern markets such as Andhra Pradesh and Karnataka barely rose. Prices, say industry watchers, are coming off in this part of the country, even as they stay firm or even rise in several pockets in the north and east. Interestingly, cement prices weren’t hurt during the last couple of monsoons, though things could be different this time around.
Analysts believe that capacity addition has been of the order of an estimated 15 million tonnes in the June 2009 quarter and it’s possible that this could translate into lower prices elsewhere like in the west. Demand in the current year is estimated to grow by as much as 7-9 per cent; despatches for the industry in 2008-09 were up 8.3 per cent.
Industry watchers say commissioning delays have helped keep prices firm so far, though the situation could change. That’s because an estimated 25 million tonnes of supply is expected to come in by the end of the year. That is why analysts believe cement stocks should be bought at lower prices.
At the current price of Rs 740, UltraTech, for instance, trades at a price-earnings multiple of 9.5 times its estimated 2009-10 earnings. At Rs 807, ACC trades at nearly 14.5 times its estimated 2009 earnings, while at Rs 99, Ambuja Cements trades at about 13.5 times its estimated 2009 earnings.
