FIIs flock to cement companies on demand surge hopes

Foreign institutional investors( FIIs), appear to be betting on a pick-up in cement demand in the next few quarters by buying into select large and mid-size cement companies. Over the last three years, some of these companies had consistently expanded capacity without stretching their balance sheets. This is expected to improve their earnings once there is a rebound in cement demand.

In the last three years, FIIs have increased their holding in the range of 5-12% in cement companies such as ACC, Ultratech, Ramco Cements, Shree Cement, India Cements and JK Lakshmi Cement. The considerable interest of FIIs in cement companies can be attributed to consistent capacity expansion by these companies, a large part of which would come in the next two and a half years. Typically, the cement industry follows seven to eight years of an expansion cycle and a subsequent recovery in demand.

Estimates show that currently cement demand is below the country’s GDP growth. Analysts point out that the recovery in cement demand is expected in the first half of FY16. By that time, large-size cement companies would have completed their capacity expansion. Ultratech, the largest cement company by capacity, saw the stake of FIIs surge close to 21% from around 13% in the last three years.

It is expected to increase capacity to 70 MT by FY16 from 59.6 MT now. Likewise, most large and mid-size cement companies have their expansion in place and by the first half of FY16, these companies are expected to complete their capacity additions. Other reason for this heightened interest in select cement companies is that their strong balance sheets. Most large-size cement companies have light balance sheets and they are trading at a debt-to-equity ratio of less than 1.

When the demand for cement picks up, strong cash flow from their operations would be adequate to address their leverage and also fuel raw material costs. Among large-size companies, South-based Ramco Cements (erstwhile Madras Cements) has generated highest interest from FIIs in the last three years. FIIs have increased their stake by 11% in the company in the last three years to 18.73%.

There are strategic reasons for this. The company is well poised among southern cement companies not only on the cost front, but also has a geographically well-diversified presence in regions such as West Bengal. This works well for the company as its peers have a high presence in the Andhra region also, where there is lack of clarity on improvement in cement demand due to political uncertainty.