Cement stocks have sharply underperformed the broader market over the past six months. For instance, ACC ended at Rs 816 on Wednesday and has declined 4% during this period compared to a 3.8% rise in the Sensex. Other leading stocks in the sector have not fared much better either, with Ambuja Cements falling 3.6% during this period, while India Cements fell 29%. In fact, the under-performance of cement stocks was highest towards mid-October.
Investor concerns relate to the key input for the industry, coal prices have shown a rising trend over the past two months. Broking house reports point out that imported coal from Australia, for instance, are currently at $80-per tonne levels, a rise of nearly 14% over the past few months, given signs of a global pick-up in industrial activity.
In addition, domestic coal prices are also up by nearly 10-15% during the same period. Analysts at Religare Hichens Harrison had estimated that this rise in domestic coal prices could push up costs for cement manufacturers by 50 paise to Rs 2 per bag (Rs 10-40 tonne).
For all-India player ACC, its power, oil & fuel costs were estimated at Rs 710 on a per tonne basis in the September 2009 quarter, a decline of 16.8% YoY. This recent rise in production costs has come at a time when cement prices, in key markets, are broadly sluggish on a YoY basis. In Mumbai, prices are currently at Rs 235-240 per bag, a fall of 4% YoY, point out sources in the industry. In New Delhi, prices are currently at Rs 230 levels per bag, broadly flat on a YoY basis.
Higher input costs and sluggish realisations could put pressure on operating profit margins of cement companies, going forward, which may not go down well with the Street. Investor caution on cement stocks has resulted in stocks in this sector trading at reasonable valuations.
For instance, ACC trades at 9.4 times trailing four-quarter earnings. UltraTech trades at 8.7 times, while Ambuja Cements is at 12.2 times. South-based India Cements gets a P/E of 7.3 times and for Madras Cement, it’s 6.2 times.