Cement Stocks – Joining the Bull Party

In our blog dated 18^th August 2010, we had covered the future prospects of cement as a sector and recommended a contrarian buy in some of the leading stocks in this sector. Cement stocks had been under-performing the markets for quite sometime and disappointing Q1FY11 results added to this under-performance. We had strongly advised investors to hunt for stock picking opportunities in the sector.

We anticipated the cement demand to pick up after September on the back of higher spending on infrastructure projects, as well as investments in the rural and urban housing segments.

Today we saw an out performance in the cement sector. This led to the benchmark Nifty crossing another milestone and closing at a 31-month high. It closed above the 5600 mark for first time since January 18, 2008.

We witnessed a significant bull rally in the out performers for the day- the cement company stocks. The shares of major cement companies like ACC and Ambuja Cements shot up 6.7% & 7.82%. Top gainers were Prism Cement, Andhra Cement and Madras Cements with a rise of around 14-16.5%.

UltraTech Cement, Barak Vally Cement, Binani Cement, Birla Corp, Chetinad Cement, Dalmia Cement, Heidelberg Cement, India Cements, JK Lakshmi Cement, Mangalam Cement, Saurastra Cement and Shree Cements were other gainers which traded anywhere from 3-11% higher.

Moving ahead, all the cement majors have expanded their installed capacity in the backdrop of government backed construction projects since these projects have created strong demand for cement in the country. It is also anticipated that industry players will continue to increase their annual cement output in coming years and the country’s total cement production will grow at a CAGR of around 10.5% during 2010-11 to 2013-14.

Demand is likely to start soaring as the Capex cycle starts picking up. Also the ongoing housing boom is likely to start absorbing excess capacity sooner than expected.

Accordingly, even after the strong rebound today we reiterate our buy call on stocks like Prism, Shree Cements etc which have a good exposure to the Northern and Central Indian Markets and are available at attractive valuations. Investors who have missed the earlier call can still use any declines to buy into this sector as cement has a long way to go in our markets.