Cement cos: Weak demand, high input cost may derail rally

The stocks Holcim-controlled ACC and Ambuja Cements are back on investors’ radar. Each of them has recently touched its 52-week highs despite expectations of a lacklustre performance in the September , 2010, quarter.

ACC touched a 52-week high of `1,049 in intra-day trade on Thursday, and closed the day at `1,030. Similarly, Ambuja Cements had touched the 52-week high of `150.25 towards the end of September. On Thursday, it closed at `141.75 on BSE.

One reason for the revival in investor interest can be the recent reports on higher cement prices in certain parts of the country. For instance, South-based players had hiked prices in late September by nearly 10-15% on hopes of pick up in construction activities. In the Northern markets too, cement prices rose by 5-8% according to analysts.

However, the scenario doesn’t look that rosy. The September quarter has been rather difficult for the sector. Some brokerage reports indicate that capacity utilisation in the sector in the second quarter was at 71% compared to more than 80% a year earlier, reflecting weak demand conditions especially in the South. Cement capacity, at the end of the first quarter, was nearly 268 million tonne and when capacity utilisation falls below 80-85% levels, prices fall.

To add to their woes, heavy monsoon across several parts of the country curtailed construction activities. As a result, average realisations for ACC is estimated to have dipped by 4-5% year-on-year basis to `3,830 per tonne levels. Also, cement manufacturers are grappling with higher operating costs, such as higher freight costs on a per tonne basis, due to hikes in diesel prices.

As per ETIG estimates, ACC is expected to see its net profit decline by 38% on a year-on-year basis in the second quarter, much steeper than the likely drop of 3.5% in net sales. Ambuja Cements’ net profit is forecast to decline just 5.7% y-o-y basis in the quarter, on expectations of a sharp reduction in its raw material costs. The company had earlier brought on stream two new kiln lines, which substantially reduced the amount of clinker purchased from third parties.

The stock of ACC trades at a P/E of nearly 12.8 times its trailing four-quarter earnings and suitably discounts any potential improvement in its performance. Ambuja Cements at a P/E of almost 15.5 times is one of the most expensive stocks in the sector.