Cement stocks have had a spectacular rally in the last one year. While large-cap stocks have seen a 20-40 per cent increase in price, the ones in the small-cap space have rallied even more sharply.

The rally has been fuelled by hopes of a revival rather than an actual turnaround in performance.

Sample this, in 2013-14, the cement sector’s sales growth has been a mere 1 per cent (clubbing revenues of the top 14 cement manufacturers in the listed space). Due to cost pressures and lower realisation, net profits dropped 17 per cent.

Cement companies, which rely largely on imported coal to meet fuel requirements due to inadequate coal linkages, saw costs mount due to steep depreciation in rupee in 2013. Higher freight charges both on rail and road transport added to costs. In addition to the increase made during the Railway Budget, the railway board increased the busy season surcharge from 12 per cent to 15 per cent for many commodities including cement.

Ambuja Cements, which is among the most efficient cement manufacturers, reported four percentage points erosion in operating margins to 18 per cent in 2013-14. Others have seen almost 8-10 percentage points dip in margin.

Even as costs shot through the roof, cement prices didn’t climb much last year. All-India cement prices averaged at ₹300 for a 50 kg bag, only ₹10 higher than the previous year. The lacklustre demand growth gave little leeway for manufacturers to increase price. Cement production for the year was up just three per cent.

Strong recovery in demand in months following the monsoon is critical to sustain the rally in cement stocks. The Union Budget can help by making higher allocations to infrastructure and housing projects. Only when demand recovers will players get their pricing power back, thus improving profits.

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