Despite cement prices weakening during the monsoons and the overall bloodbath in the Indian markets cement sector analysts are bullish on the sector. Investors can expect at least 10-15 per cent returns from Gujarat Ambuja, Shree Cements and ACC even in a weak market, they believe.
While the government initiative to talk down cement prices in recent times was not enough, the onset of monsoons will further add to a weak sentiment for cement stocks in the near-term believe the three analysts polled by Moneycontrol.com. However, in the long-run, demand-supply mismatches, absence of fresh capacity expansion and the strengthening pace of infrastructure growth in India will help the sector emerge a winner, is their unanimous view.
Historically, during the monsoons the cement prices see a dip and this time too they are likely to come down by Rs 10-15 per bag. This should not, however, deter long-term investors in buying good cement stocks feels Ashish Ahuja of Khandwala Securities.
"The prices will not fall much during the monsoons despite the historical trend. The prices are expected to fall by only Rs 10 per bag due to weak demand and construction activities during the four months of the monsoons from June-September. However, post monsoons there will be robust demand for cement and prices will pick up in proportion due to the ongoing infrastructure projects," is his bullish opinion on the sector.
Yet another sector expert, Nakul Dharmawat of Pioneer Intermediaries feels that cement prices will dip by 10-15 per cent from the current levels on an average during the monsoons. However, for the long-term, cement sector is a good investment bet, he adds.
"Infrastructure sector has picked up considerable pace and capacities are not being expanded in a big way.
"I believe the demand-supply mismatch is likely to persist for the next 24 months. This will ensure higher realizations for the cement companies and they will post strong numbers this year compared to the previous year," is his argument in support of the sector.
But can the sector support investors in a falling market like the one being witnessed currently. Nilesh Shetty of Pranav Securities offers his macro-view: Out of all the potential investment sectors, cement was one of the best bets. Because of the index re-rating, the cement sector was getting a higher PE multiple compared to the index. By extension, in a falling market, cement stocks will bear the severest brunt.
Nevertheless, even in a falling market, Shetty believes that stocks like Gujarat Ambuja, ACC and Shree Cements can provide investors with defensive 10-15 per cent returns.
"Even if the index is bad, one can expect 10-15 per cent returns from these stocks," is his bold bet on the cement sector. But what if the downtrend is reversed for good.
"If the index reverses for the good then the cement sector will be the first to pick up and will lead the rally. Gujarat Ambuja, ACC and Shree Cement will outperform the broader markets with a long-term view."
Even Ahuja and Dharmawat are putting their money on the sector albeit, with a long-term perspective. "I'm very bullish on the sector with a 12-18 months investment period. The Indian economy is growing at a nifty 8% plus and there is no new capacity coming up in the near future.
This is leading to a sharp demand-supply mismatch that is conducive for further price hikes. Factors like these along with strong demand for cement makes me take a bullish view on the cement sector," says Ahuja.
ACC is his top-pick in the sector followed by India Cement. Both can notch 25-30 per cent returns in the next 12-18 months is his advise to investors.
Dharmawat, on the other hand, says, "Shree Cement, Gujarat Ambuja and ACC are my long-term picks from this sector. Returns in these stocks can be anywhere between 20-30 per cent in the next 24 months."
He however is quick to warn short-term investors. In the current market trend stock prices of even good cement companies may go down substantially, adds he. "This dip, however, can be used for strengthening one's portfolio. One can expect a very good amount of money from this sector if investors remain in the stocks for at least a year or two."
In conclusion, all the three analysts believe that the sector still remains attractive from a long-term investment horizon. Strong pick up in infrastructure activity post monsoon, demand-supply gap remaining unplugged for another two years will ensure higher realizations for cement companies leading to robust financial numbers in FY07.
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