Despite the Chennai flood and cement price corrections in South India, the stocks of south-based cement players have not seen a deep correction. Ramco Cements, Dalmia Bharat and India Cements, which have significant exposure to Tamil Nadu, are trading at Rs 371, Rs 782 and Rs 83, slightly lower than levels seen in November end. While the demand and realisation in the current December’15 quarter have remained soft in South India leading to correction in cement prices (estimated Rs 10-20 a bag), recent unexpected rains have led to some dip in sales volumes. This may result in cement companies reporting a much softer December quarter performance feel analysts, but cement demand is likely to get a major push thereafter.
The damage done by excessive rains will lead to a pickup in construction activities and there will be a push from government side too. While analysts had been anticipating a turnaround and boost from March’16 quarter, the recent events may add to upsurge in demand leading to an increase in capacity utilisations. The capacity utilisations have been at close to 60 per cent levels in the South compared to all India average of more than 70 per cent. The South India players thereby are once again in a sweet spot, feel analysts.
Cement prices in South India had gained about Rs 5-10 a 50 kg bag in October’15, but could not sustain and fell by Rs 3-5 a bag in November mainly on account of moderate correction in Bangalore and Kerala markets. Average cement price were ruling at Rs 350-355 a bag (down a per cent over previous month and up 14 per cent year-on-year) as per Reliance Securities channel checks at the end of November. With torrential rains impacting Tamil Nadu and adjoining states too, further pressure is likely to have come now. Analysts at Karvy say that heavy rainfall in Tamil Nadu and coastal Andhra Pradesh are playing a key role in sluggish demand in near-term. Nevertheless, cement prices in South India will bounce back sharply, feel analysts, adding that now the state government will also allocate more for developing Chennai infrastructure and other parts of Tamil Nadu. This coupled with expected boost in infrastructure spending in Andhra Pradesh and Telangana, which are working hard to boost investments in the states, should lead to revival in cement demand.
Analysts at Reliance Securities say that at the current market price, they have Buy recommendation on UltraTech Cement in the large cap space while in mid-cap space Ramco Cements is their pick from south centric players. UltraTech being a pan-India player will also benefit from a recovery in South, while Ramco is likely to be a major beneficiary. India Cements, too, would benefit from this boost in demand. Analysts at Angel Broking like both Ramco Cements and India Cements. However, the stress on the balance sheet is what keeps the street sentiments under check.
Analysts at Nomura in their note a few days back had said, “As we adjust our target price for India Cements with CSK (Chennai Super Kings) valuations and incorporate our changes in earnings estimates to reflect better pricing in south India, the stock appears fairly valued”. They had target price of Rs 87. Amongst others to be looked at is Dalmia Bharat Cement that has adequate capacities in Tami Nadu and Andhra Pradesh. The company should benefit from growing cement demand. Analysts are positive on the stock even as it has seen sharp run up and almost doubled in a year.
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