Cement stocks have corrected eight per cent over the last one month, while the Sensex is down 3.5 per cent.
Like many other sectors, the good days have eluded the cement sector, too, in FY15. For the past five years, demand has been growing at a CAGR of less than five per cent. The current financial year will not be an exception, even if economic growth shows a sharp rebound. Analysts are now pushing demand revival to FY17, as the first two months of the current financial year have not shown any meaningful pick-up in demand. With the onset of monsoon, demand is expected to remain weak for the next three months also.
Cement stocks have corrected eight per cent over the last one month, while the Sensex is down 3.5 per cent. In June, cement prices in North and Central India dipped, while in the East, South and West prices improved marginally. In Delhi and Gurgaon, prices fell Rs 10-20 a bag to Rs 240. Prices have shown a similar pattern in Bhopal, Lucknow, Noida and Kanpur. Anand Rathi claims dealer checks have shown that demand is expected to remain muted in the coming months, too. According to IDFC Securities,?Non-South companies are likely to see lower operating income per tonne on a quarter-on-quarter basis due to weak pricing and cost escalation (higher freight charges). Pricing in the South has seen some correction in May, hence, EBITDA/tonne for South-based players would see some sequential moderation.? So far, there is no visible sign of any pick up in infrastructure spending and, as a result, the demand has remained muted. The Street is expecting a rebound in demand to happen in the second half of FY16 for cement too. JPMorgan expects a sharp rebound in cement demand, as government spending on infrastructure is expected to rise and is building in pan-India demand growth of cement at 6.5 per cent in FY16 and nine per cent in FY17.
Analysts also believe existing players would also command a premium as building a greenfield cement plan would not be very difficult, given the norms around land acquisition and access to raw materials. In addition, large cement companies are trading at close to their mean valuations over the last three years. In addition, these companies are expected to see operating income grow 25 per cent CAGE over FY15-17, making the risk reward attractive.
Source: Business Standard
Stocks in demand
Mangalam Cement: The expectation is that the way road projects have been announced and once they start picking up after this monsoon period, there will be a sharp uptick in the demand and that will help them in gaining which will mean that their margin EBITDA per tonne can improve substantially. So, that is the basic reason for buying Mangalam Cement. On the topline CAGR will be 19-20 per cent but on the bottom line it could be around Rs 25-30 per cent, so it is good earnings growth story and valuation wise very attractive.
Source: www.moneycontrol.com
Orient Cement: Emkay Global Financial Services recommends accumulate rating on the stock with a target price of Rs 184 sales volume in April-May remain better compared to industry average in its key markets (South and West) region helped by higher exposure to the West region. Price in the South region remained better compared to other regions, weakness seen in the West region Gulbarga, Karnatak plant with a capacity of 3 mtpa is expected to start commercial production by end-July 2015.
Source: www.moneycontrol.com
JK Lakshmi Cement: According to Centrum Wealth Management JK Lakshmi Cement can be a good stock to count on due to three factors: Ideally with the correction, the stocks should have corrected so that you have valuation comfort; Hopefully you should not be expecting subdued results or negative surprises starting from immediate quarter in short-term; and Over a period of time they should give growth. So that is the reason for choosing JK Cement.
Source: www.moneycontrol.com