Cement Stocks Outlook: Likely to move in 2-3% range next week

[B. Karthick]

Cement Stocks Outlook: Likely to move in 2-3% range next week
Saturday, Aug 9

Most cement shares are likely to move in a narrow range of 2-3%
next week after witnessing 5-12% rise in the week gone by, as
valuation argument is unlikely to support these shares amid weak
outlook.
Despite cement shares trading around their 52-week low and valued
even below their replacement cost, investors may not buy these stocks
due to fall in companies' profitability hereon.
Currently, frontline cement shares are trading at an enterprise
value of $85-$90 per 1 tn against replacement value of $120-135 per 1
tn.
In the week gone by, shares of ACC, Ambuja Cements, UltraTech
Cement, Grasim Industries, and India Cements rose 5-12% on account of
easing crude oil prices, which was seen as a pre-curser to a fall in
prices of coal, key raw material for cement production.
However, most analysts are still cautious on the sector, as
proposed expansion is likely to impact pricing scenario, and restrict
improvement in profitability.
The industry would witness capacity addition worth 32 mln tn in
2008-09 (Apr-Mar) and 47 mln tn in 2009-10, even after considering
delays in expansion.
In Apr-Jun, cement majors reported 600-800 basis points fall in
operating margin due to spiralling cost pressure, especially coal
prices, and inability to hike prices adequately.
Although the agreement with the government to hold prices for
three months has ended in July, cement makers are not in a position to
hike prices as demand for the commodity has declined due to monsoon.
With exception of southern region, prices of cement are likely to
remain flat to negative for most part of August due to monsoon.
Prices in south are likely to see a firm trend.
Large cement manufacturers reported mixed growth in July sales on
the back of sustained demand for the commodity in southern region,
while fall in northern and eastern regions due to monsoon.
Outlook for demand and sales in August is sluggish with prices
likely to remain flat to negative, except in south India.

STOCK VIEW
Techinically we also expect a sideways movement in cement shares.
Shares of Ambuja Cements are expected to find support at 84.40
rupees next week with resistance seen at 89.50 rupees.
Grasim Industries is likely to face resistance at 2,100 rupees
while support is seen at 1,995 rupees.
Shares of ACC are likely to find immediate resistance at 650
rupees. It may touch 685 rupees if it manages to breach the first
resistance.
Shares of UltraTech Cement are expected to witness major
resistance at 670 rupees, while support is likely at 620 rupees.
Support for India Cements shares is seen at 156 rupees. It may
face major resistance at 173 rupees.

This week's closing prices, in rupees, of key cement shares, on
National Stock Exchange, compared with previous week:

Company Closing price Closing price % Change
Aug 8 Aug 1

ACC 629.30 577.40
9.0%
Grasim Industries 2033.80 1,833.00 11.2%
Ambuja Cements 86.95 82.75 5.1%
India Cements 162.45 146.30 10.6%
Ultratech Cement 636.60 566.55 12.0%

Sensex 15167.82 14656.69
3.5%
Nifty 4529.50
4413.55 2.6%

End

B.Karthick
Research Analyst.