Small is strong

Small is strong
Published: 29 January 2007

The robust Q3 results could impart greater sustainability to the massive capacity expansion plans of mid-sized cement companies.
 
If the story of large-cap cement stocks is something that makes you yawn, the mid-sized companies may have something to interest you.
 
“Most of the good news in large-cap cement stocks is already priced in,” explains an analyst tracking the cement sector, “but mid-cap valuations are still quite attractive.”
 
The valuation gap is evident–most cement scrips in the BSE Midcap index trade at 6.5-13.5 times their estimated FY07 earnings, while the cheapest frontline stock–UltraTech–trades at 16 times. And, if all this doesn’t entice you, the phenomenal Q3 results are quite a heart-stopper by themselves.
 
A bagful of goodies
Perhaps the defining facet of the December quarter results was the massive jump in operating profit margins ranging from 1400 to 3000 basis points y-o-y.
 
The North-based Shree Cements which was the lone 30 plus percent margin player in the midcap arena last year has been surpassed by Prism and the South-based Dalmia Cements in Q3.
 
Both these players recorded margins of over 45 per cent registering the greatest margin gains among peers.
 
The strong showing was mainly due to rising prices and the demand-supply mismatch. For example in the nine months ended December 2006, net sales increased by 53 per cent to Rs 3900.5 crore for the four companies that have released their results.
 
Cement prices have gone up in the range of 19-45 per cent across regions. With operating capacities over 95 per cent for most players, pricing power has increased too. Net profit margins have also increased from 6 to 22 per cent in the same period.