FIIs go bullish on cement stocks

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FIIs go bullish on cement stocks (updated - 20 Aug 2010)
Demand expected to rise after the monsoon, say analysts. Despite a slowdown in the domestic cement market, foreign institutional investors (FIIs) seem bullish on the sector.

According to the Bombay Stock Exchange data for the quarter ended June, FIIs’ holdings in the large-cap and mid-cap cement companies have increased, both sequentially and yearly.

Industry analysts say FIIs are taking a mid- to long-term view on the sector, as the market is likely to rebound after monsoon.

For instance, FIIs’ stake in ACC has risen 0.21 per cent to 12.77 per cent against 12.46 per cent at the end of the March quarter. Similarly, Ambuja Cements and UltraTech Cement have seen higher FII interest (see above table for more reference)
Vineet Hetamasaria, analyst at PINC research, said: “Whatever corrections had to happen have happened. It’s a consolidation phase now. FIIs are taking a mid-term view on the sector that is seeing a temporary slowdown. After the monsoon, cement demand and sector will recover.” On the valuation front, the large-cap cement makers are currently witnessing a replacement cost of $100-115 a tonne (enterprise value, EV per tonne), while the mid-cap firms are valued at $65-80 a tonne.

The industry is fairly consolidated region-wise. In every region, the top three players, with a pan-India presence, are controlling 75-80 per cent of market share along with a regional cement major.

“Consolidation in the cement space is a good signal. Though sentiments will remain subdued, as pressure on margins and prices will continue, we do not anticipate any significant correction in the short term,” said, Rupesh Sankhe, analyst at Angel Broking.

The industry’s growth in the current financial year is weakening by every month on a year-on-year basis. In July, too, growth declined to 1.6 per cent against over nine per cent in the corresponding month last year.

On an average, cement prices have fallen Rs 25-30 to Rs 220-225 a bag (50 kg). However, region-wise, the price variation is wide, with southern market seeing the worst decline in prices as well as demand. On Thursday, shares of cement majors traded strong on BSE. Ambuja Cements rose 8.16 per cent to Rs 123.95, while ACC and UltraTech Cements were up 4.86 per cent and 3.31 per cent, respectively. Stocks of Shree Cement and India Cements also jumped 3.36 per cent and six per cent, respectively.

Conclusion – In next 12 to 18 months the investment in these stocks would provide good returns.