Analyst expect the cement sector go through strong growth during the current fiscal year with higher demand and profit margins, however they estimated it to be unsustainable due to continuous increase in production capacity by all the major companies.
Post- October 8, 2005, the hype about the incremental demand from reconstruction activities and exceptionally higher results announced by cement companies for the first quarter of fiscal 2005-06 has brought investors’ teeming back to the cement sector, which is expected to continue till the good results hold out.
In the absence of any government interference, cement companies will keep earning
higher retentions on the back of high prices. Contribution margins in the industry have touched all time high levels. And this is likely to continue till at least June 06, owing to better retention levels and dropping coal prices.
“Resultantly cement companies are likely to post higher earnings growth in the short term, whereas post capacity additions, the decline will be more visible in 2007 and beyond,” said Shagufta Irshad, an analyst at KASB Securities. Given that the sector by nature draws short-term interest, it will continue to pull in the crowd till good results last. “We foresee the sector to stay in investment focus over the next six months.” However, still there are valid concerns over the long-term potential of the cement industry since it is expected that the industry could to face a glut situation in 2007-2008, which will pose a serious threat to retention levels in 2007. Additionally, there is a greater possibility of a tussle among large players in the cartel over recognition of the expanded capacity.
She said since it was primarily a top-down play, we suggest that investors allocate their interest in the sector in accordance with relative pricing for cement stocks. Thus it is expected and also recommend investors to keep Lucky, Maple Leaf and Cherat in their short-term portfolio, whereas it is recommend investors to buy Cherat Cement for the long term.
Cement companies are expected to post 75 per cent growth in earnings in fiscal year 2006 and cement manufacturers are expected to report buoyant growth in earnings during the remaining part of this fiscal year, where companies whose expansions are expected to come on line within this fiscal year, Lucky and Pioneer would be outperforming others.