India surplus capacity to weaken cement prices

India surplus capacity to weaken cement prices
Published: 15 December 2008

The cement sector has been battling with a loss of investor confidence since the past year or so, with the ET Cement index declining a whopping 67.2% over the past one year, compared to a 52.4% fall in the Sensex during the period. In addition, several cement stocks like ACC, Grasim and Shree Cement had touched their individual 52-week lows on October 27, and have recovered somewhat since then, in line with a recovery in the broader market.

For instance, ACC ended Friday’s trade at Rs 494, compared to its 52-week low of Rs 369. Grasim closed at Rs 1,073.60 on Friday , compared to its 52-week low of Rs 831. Even a mid-cap stock like Shree Cement closed at Rs 450 on Friday, while its 52-week low was Rs 330.

Investors are increasingly worried about a likely over-capacity in the sector from FY10 onwards. This, in turn, is likely to depress cement prices and significantly lower companies’ profitability. According to various estimates, the cement industry is expected to add 35-39Mt of fresh capacity in FY10, against incremental demand growth of 10-12Mt, assuming annualised demand growth of 5-6 %. This will be followed by another 34 Mt of capacity addition.