Shares of Indian cement companies have declined amid concerns about increased government intervention in the industry. While analysts and investment managers don’t expect a quick recovery, some say it is time for selective bargain hunting.
Cement stocks had been riding high on the Bombay Stock Exchange for more than a year as Indian developers and construction businesses gobbled up supplies to build a spate of shopping malls, roads and residential complexes. While cement companies operated at near 100% capacity, supply remained tight, driving up prices nearly 20% last year, compared with 2005.
The government -- trying to contain the inflation rate, which is hovering above 6% -- announced an unexpected one-year freeze on cement prices March 9. Most cement stocks have fallen nearly 30% since the announcement.
Analysts say industry earnings are unlikely to recover anytime soon.
"The sector was enjoying premium valuations, but a ban on any further price hikes for the next 12 months will affect profits," says Revathi Myneni, an analyst with Edelweiss Securities in Mumbai, India.
The freeze will sting cement companies because price increases have been the biggest contributor to profit expansion in the past year, analysts say. After the freeze is lifted, prices aren’t likely to rise sharply because the cement industry is expected to have added 18 million metric tons of capacity by then, easing pressure on supplies. India’s current installed capacity is estimated at 169Mt.
Under the government’s freeze, cement companies also will have to absorb all increases in the price of inputs and materials. (Freight and fuel, taken together, account for nearly half of the cost of making cement.)