Following the surge in the markets, there are apprehensions if the rally was sustainable due to pricey valuations. However, cement sector seems to be exempted from the uneasiness around on the back of robust demand coupled with limited supply, says The Economic Times.
On a month-on-month basis, cement shares have fared better than the 30-share Sensex, rising between 6-16 per cent compared with a four per cent rise in the index, on expectations companies will report signficant earnings growth for July-September quarter.Brokerage Sharekhan expects a 38-40 per cent growth in topline for domestic cement companies in the quarter.
"We expect the sector as a whole to report an impressive performance for the second quarter of this financial year due to a 9-10 per cent growth in the cement volume and a huge 29-30 per cent rise in their cement realisation," a Sharekhan report said.Expectations of robust earnings is mainly because cement prices remained stable even during monsoon, when sales normally dip.
"Cement prices have remained remarkably resilient during the monsoon season of 2006 and have come down by barely two per cent since June’06," investment bank CLSA said in a recent report. At the same time, cement companies posted a growth of 19.2 per cent in despatches for September from the same period last year on back of strong demand growth.
Morgan Stanley expects the growth in cement prices to continue in the southern and northern markets for the next few months. At the same time it has cautioned that the growth in prices could be at the cost of despatches. "We believe the top players will have to continue to take market share cuts by dropping dispatches to move prices higher over the next 12 months," a Morgan Stanley note added.
Since September, cement prices have risen Rs5-10 a 50/kg bag in most parts of the country, analysts said.Brokerage ASK Raymond James expects cement prices to rise further by Rs3-5 a 50/kg bag in 2006-07. Late last week SBI Capital Markets joined the bandwagon of analysts cheering the cement sector.
"Various new sources of cement demand have emerged in the last one year which include SEZs, retail and faster pace of real estate development, etc. All these developments will propel the cement demand to new heights in the next five years," the SBI Caps report said. But now the most important question remains that are cement stocks cheap?
They do not appear so. According to estimates by brokerage house CLSA Securities (which is bullish on the sector), key stocks are currently trading between 11-14 times estimated FY08 earnings. But analysts tracking the sector argue that valuations are still reasonable compared with what they were in the mid-nineties when the cement cycle was at its peak.
The fundamental story is intact, but if too many players are bullish on a sector at the same time, the stocks won’t rise as quickly as everybody expects them to," said an analyst at a domestic brokerage house.