The Hindu Business Line : Cement stocks betting on pricing power

Even as numbers for the December quarter are expected to be below expectations, there is a perception that going forward with the demand-supply gap reducing, cement manufacturers would enjoy higher pricing power.

As per reports, the last three months' double-digit volume growth has led to the November month-end inventory falling below six million tonnes for the first time in the last four years.

According to a Motilal Oswal Securities report on the cement sector, if double-digit volume growth continues, one might see the industry operating at 100 per cent capacity utilisation for March-May 2005. As such, the Northern and Central regions may face short-term deficit in the next two quarters .

Tracking the trend in industry inventory, the report maintains that over the last three months inventory has consistently declined as a result of the double-digit dispatch growth.

Cement despatches have shown a smart recovery from September. For instance, dispatch growth increased to 6.7 per cent for the period April-November 2004 as against 3.1 per cent April-August 2004.

The last three months' double-digit volume growth has also led to a reduction in the cement industry's inventory (cement +clinker closing stock) at end-November 2004 to 5.93 million tonne from 7.05 million tonne as at end-November 2003.

"We believe that high volume growth for the cement industry would continue in the coming years, reducing the gap between demand and supply. As a result, cement manufacturers would enjoy higher pricing power," the report adds.

While bullish on the fortunes of the cement sector, Mr Dilip Bhat, Director, Research at Prabhudas Liladher is of the view that the Gujarat factor is a sore thumb in otherwise optimistic scenario.

"Going forward a further consolidation of the industry coupled with the road sector orders will provide a boost to cement consumption," he added.

Analyst Mr Kausal Shah of LKP Securities maintains that the North and the East have a better supply-demand dynamics vis-à-vis the West and the South. According to him, cement consumption numbers in the South, for the period April-Oct 04 show a noticeable drop.

While Andhra Pradesh has seen an 11.2-per cent drop vis-à-vis the corresponding period last year, Tamil Nadu has seen a 6.3-per cent drop with Karnataka witnessing an 8.7-per cent drop.

He is of the view that rising exports will provide the key to maintaining robust demand.

"Last eight-nine months have seen a rise in exports of cement and clinker. And with demand expected to remain robust (particularly from the Middle East), the visibility of cement exports is reportedly quite bright. Any excess supply should tend to decline going forward," he added.

The counters of ACC, GACL, UltraTech, Grasim ruled firm on the bourses today. ACC ended at Rs 324.80 (BSE), GACL at Rs 401(NSE) and UltraTech at Rs 327 (BSE).

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