Tuesday, May 5, 2015

Cement stocks crack, fall 16-21% in last two months

In the past two months, shares of cement companies have underperformed the benchmark indices due to poor demand, declining profits and low realisations. Shares of UltraTech, ACC, Ambuja and JK Cement have lost 16-21 per cent, against a fall of 8.6 per cent in the benchmark indices.

The sector, considered a proxy for infrastructure development in the country, has seen de-rating in valuations in the past year.

Shares of UltraTech, India’s largest cement maker, have been hit the worst. After an all-time high of Rs 3,399 in early March, the stock has lost about a fifth of its value and is currently at Rs 2,703, down 20.5 per cent. The company recorded a fall of three per cent in sales volume in the March quarter, while profit fell 24 per cent.

The ACC stock lost 17 per cent, from Rs 1,775 to Rs 1,468. The company’s net profit fell 41 per cent in the quarter, while cement sales volume plunged 10 per cent year-on-year.

Ambuja Cements, ACC’s sister company, was also hit. Following a poor quarterly performance, when sales fell nine per cent and profit was down 39 per cent, the stock took a beating. After an all-time high of Rs 286.85, it corrected 17 per cent to Rs 239.

Analysts say a further fall can’t be ruled out, as demand looks grim. Piyush Jain, equity research analyst at Morningstar India, said, “Clearly, the anticipated demand pick-up is missing. Construction activities are yet to start, which will further delay growth in consumption. I believe the corrections in these stocks were overdue; now, these are back to realistic valuations. However, there could be lower entry points for investors.”
Analysts say falling rural income and lack of improvement in the economy pose challenges for the sector. Also, a supply-demand mismatch will continue to put pressure on companies’ operating margins. Against an overall capacity of 380 million tonnes (mt) a year, India’s consumption isn’t more than 285 mt.

Owing to this, capacity utilisation has fallen to 72 per cent, while companies in the sector continue to lose control over pricing.
SOURCE - business-standard

No comments: