Cement stocks gain on hopes of demand recovery

Cement stocks are racing ahead of stock market benchmarks, as investors bet that easing lockdowns, post-monsoon construction and the government’s infrastructure push will boost volumes and prices in the coming quarters.

Since 1 June, shares of Andhra Cements, Shiva Cement, JK Lakshmi Cement, Shree Digvijay Cement, Dalmia Bharat, The Ramco Cements, Ambuja Cements, India Cement and JK Cement have gained between 5% and 95%. In the same period, benchmark indices Sensex and Nifty managed to clock gains of just 1.8% and 1.5%, respectively.

“Despite the negativity inflicted by the second wave of covid-19, sentiments remained positive. We expect the government to continue its spending spree on infrastructure development and mega affordable housing schemes to support the economy and enhance job creation. Housing demand remained resilient across the markets. We remain confident on sustainability of margins as we believe that the sector has ample pricing power to mitigate increase in input costs”, broking firm Prabhudas Lilladher said in a report to its investors.

According to Reliance Securities, all-India cement demand held up well in May, with a decline of 13% from April. Year-on-year, it is expected to have grown by 4% on a negative base of 10%. Most importantly, activity picked up strongly in June as volumes are estimated to have increased by 17% from April (and 6% from a year ago), the report added.

“Among regions, North is expected to outperform with 25% growth month-on-month (MoM) on a flattish base. Volumes in the central region are expected to grow at 12% on a flat base. Though growth in east/south would look optically better at 20%/10% MoM, it came on a weak base of 25%/25% decline. Western region’s demand is expected to grow at 10% MoM on a negative base of 9%.”

The brokerage added that all-India average price is expected to have improved by strong 5.2% quarter-on-quarter (up 1.5% year-on-year) in first quarter of FY22E, mainly aided by sharp improvement in Southern region (up 9.9% QoQ), Eastern (up 7.4% QoQ) and Western (up 5.8% QoQ). This was despite the second covid wave and localized lockdowns.

However, analysts at broking firm Nirmal Bang cautioned that further further price hikes are unlikely, primarily due to seasonality and also due to pressure from various customers who are opposing price hikes.