Look around – do you see any construction happening? Do you see infra projects happening at a frenzy? Are houses being built at the same levels as last year?

The common answer to all these questions is a BIG ‘NO.’

Yet, today, the market has decided to look at the brighter side of the ACC numbers for June quarter and stock price is up in the green. The optimism is so good that it has spread around to all cement stocks and they all are beaming happy today.

So, what’s happening? ACC, which follows a Jan – Dec year ending, for the June quarter, posted a 40.5% (YoY) decline in consolidated net profit at Rs.271 crore and topline too saw a 37% drop. Brokerages are suddenly all gung-ho about the stock and said that the tailwinds are very strong. All of them and consequently the market, is concentrating on the fact that low costs and operational efficiency, along with better price realization helped the company mitigate a disaster in May and June. Low volumes were more than made up by higher realisations. And that’s the story here – how come cement companies are selling at higher prices even when demand is low?

Most analysts are expecting the high prices to remain more or less same even into the September, which is seasonally the weakest for the cement sector due to the monsoon. How?

Lower supply- that’s the simple answer. With overall demand itself being low, capacity utilization is around 55 to 60% but even if that is low, companies need to keep their margins intact as they need to service debt and other fixed costs. The pressure is on for all cement companies to keep the prices up because even if the volumes fall, they need to keep the margins up or intact.

Thus production discipline is dictating cement price and not demand. Being more of a ‘manufacturer’ led rally, more than by the market led demand-supply trend, the perception is that this ‘strength’ which we see in cement will show resurgence after monsoon. Prices remaining strong is here to stay though Q2 seasonality will come into play.

Already, in July, price of cement for 1 bag of cement (50 kg) in South is down 1% (MoM), North is down 2% and East is down 1%. Western and Central India, prices remain strong. Seasonally, in Q2, prices do come down by an average of 2% sequentially.

The rally that we see in the cement stocks today is more on account of the strong tailwinds. Brokerage houses and analysts are unanimous in predicting a major pick up in construction activity, post monsoon. They expect the labour to start returning after the monsoon sowing is done and by Diwali, majority of the labour is expected to have returned.

Q2 will be seasonally weak- we are already seeing a fall in demand and prices have come off a bit. But second half should ideally see a sharp recovery for the sector. Construction is the biggest employment generator and this is the sector which will first get back on its feet.

India Cement, Ambuja Cement, Ultratech, ACC – all the front line cement stocks are strong. But wait for the prices to drop before you buy into any cement stock – Q2 will give more buying opportunities.