CEMENT - BUILDING UP EVEN AS PRICES FALL

This is the monsoon season and cyclically, this is the lowest, ebb time for cement companies. And as such also, with realty in the doldrums and construction activities across the country on a standstill, little wonder that cement  is looked at cynically by many.

For the past three months, cement prices have been down. Bloomberg reported today that the average month-on-month sale of cement bags (50kg per bag) has been coming down since June. In North India, prices have been cut by Rs.10/bag and the price is hovering currently at Rs.340-345/bag. A further Rs.15-20 price cut is not ruled out.

In Eastern India too, prices have come down by Rs.10/bag to Rs.320 with the steepest fall in South India at around Rs.30/bag price cut; the floods and stalled projects have pulled down the price to Rs.305-307/bag.  In Western India prices have been cut by around Rs.8/bag  and the price is now at Rs.329/bag.

Despite this news, take a look at the cement stock prices on the stock exchanges today and you will see that almost all of them are in the green; no fireworks but holding to the gains despite report of falling prices.

So why are investors/traders buying cement stocks? Because as we stated earlier, it’s a cyclical trend; it happens every year. Thus it is not a one-off crisis- in-the-sector kind of event.

And the cement companies themselves are looking ahead at Q3 and Q4 for better times. Cement dealers in some parts of Gujarat and Mumbai have already been told that cement bag prices could be hiked  by around Rs.5-10/bag, effective 1st Sept. In South India too, Ambuja Cement and Ultratech have told its dealers to hike prices by Rs.50-80/bag. But the question remains whether the market will be able to absorb the price hike as construction activity is yet to begin and monsoon is not yet over.

Yet the underlying fact remains that cyclically, cement prices will soon be on the uptick. Cement Stockists & Dealers Association of Bombay stated that it too expects pickup in demand in cement after monsoon.

And if the Govt sticks to its promise to investing Rs.100 crore in infrastructure and impetus to the Govt housing schemes, it would been good times for the sector as these spends have multiplier effect. Q2FY20 earnings are sure to be low and nowhere near the margins that we saw in Q1. But YoY, from Q3 onwards things could start looking upwards. Improvement in capacity utilization is expected to begin from Q4.

Cement companies and stocks are on the uptick; that’s the bottomline. Q2 v/s Q1 might not exactly be great buy YoY, it will most certainly be good. So hold on to that cement stock and build up; Ultratech and Deccan Cement are two of the best bets in the sector for the long term.