Notwithstanding poor results, cement stocks rally on demand revival hopes

Notwithstanding the weak financial numbers posted in the December quarter, cement stocks have attracted investor interest with stock prices rallying on hopes of revival in demand post-demonetisation.

UltraTech Cement reported that its sales volume and turnover were down 2 per cent each at 11 million tonnes (mt) and ₹5,540 crore (₹5,652 crore) in the December quarter due to weak demand.

ACC’s production was down 9 per cent at 5.45 mt, while sales turnover dipped 6 per cent to ₹2,672 crore (₹2,846 crore). The company’s net profit almost halved to ₹56 crore (₹102 crore).

Sales at Ambuja Cements were down 6 per cent at ₹2,197 crore, while production slipped 9 per cent to 5 mt. The trend was similar with almost all the leading cement manufacturers.

However, shares of cement companies have caught investors’ fancy in the last one week. UltraTech Cement stock gained 3 per cent to ₹3,790 from ₹3,677 recorded on February 15. Similarly, stocks of Shree Cement and JK Lakshmi were up 6 per cent and 4 per cent at ₹16,394 and ₹395, respectively.

India Cement gained 8 per cent to ₹166. Ambuja Cements and ACC remained flat during this period at ₹232 (₹235) and ₹1,437 (₹1,442).

Kamlesh Bagmar, Senior Research Analyst, Prabhudas Lilladher said the impact of the high-value currency demonetisation on the cement sector was not as severe as expected and most of them have managed to come out of it fast. However, he added, the concern over the ability of these companies to handle rising input costs remains a key challenge.

Binod Modi, Research Analyst, Reliance Securities said contrary to the expectation of a sharp recovery in demand owing to favourable monsoon, demonetisation put the brakes on volume growth and the impact was felt more in the individual home builder segment, which accounts for over 50 per cent of total cement consumption.

The government has announced ambitious plans to invest ₹3.96 lakh crore in improving infrastructure across rail, road, waterways and civil aviation during the next fiscal. The Finance Ministry has also proposed amendments to the Airports Authority of India Act to monetise surplus land for the development of airports across States. This could trigger demand for cement across the country.

With the slow revival in demand, cement companies would manage to pass on the incremental rise in cost of production and protect their margins, said Bagmar.

Increase in sale of cement to institutional buyers (usually at a discount of ₹20-30 a bag) may pose a challenge for companies in registering a sharp jump in realisation, said Modi.

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