Construction-related stocks may underperform markets

MUMBAI: The outlook for shares of consumer durable companies that benefit from construction activities appears bleak over the next six months as valuations are stretched with earnings growth expected to be subdued. Analysts said volume growth for companies in cement, paints, plywood, pipes and fans are likely to be weak in the June quarter results due next month in the absence of a pick-up in economic activity.

Stocks such as Havells, Bajaj Electricals, Crompton Greaves, Cummins, UltraTech Cements, Ambuja Cements, Shree Cement, ACC, Ramco Cement, Asian Paints, Berger Paints and Supreme Industries among others may underperform the market in the near term, said analysts. “Nothing that we heard suggested that the demand situation in Q1 of FY2016 is better than it was in 4Q,” said Ambit Capital in a report after interacting with various dealers and distributors. “Alongside demand weakness, we continue to see working capital cycles being stretched in paints and pipes."

Many of these stocks, which were the best performers in 2014 on optimism over the government’s plans on smart cities and low-cost housing, have weakened of late. Shree Cement, Compton, ACC, Century Ply, Berger Paints and Finolex Cables have declined between 5% and 10% against the 1% rise in the Sensex.

“Building products’ stocks have seen sharp correction in the last three months on earnings disappointment,” said Gunjan Prithyani, analyst, JP Morgan. “Near-term growth trends are likely to remain sluggish and demand improvement is likely to take time.”

Slowdown in real estate construction, volatile commodity prices, cash flow problems and moderation in rural demand impacted earnings of these companies in the January-March quarter. Aggregate growth of companies involved in building material business moderated to 8% in the March quarter from the same period a year ago as against high double-digit growth seen over the last few years.

Analysts, however, are optimistic about the prospects of these companies over the next three years. “We believe the first half of FY16 will remain sluggish given the lukewarm demand, but we remain positive on longer-term prospects with industry revenue CAGR of 14% over FY2015-17,” said Samir Tulshan, analyst, JM Financial. “But we remain positive on longer-term prospects especially over the government’s focus on projects like 'housing for all' by 2022 and ‘swachh bharat abhiyan’.”

“Valuations of most of the stocks of building material suppliers are quoting at a premium to their historical values, but this is going to sustain,” said G Chokkalingam, founder & CEO, Equinomics Research & Advisory. “There has been a sharp re-rating of these stocks in the past year over government's initiatives on low-cost housing and smart cities,” he said.