Cement sector to post subdued results

The cement sector is likely to report subdued results for Q3FY08 due to lower off-take during the quarter, analysts at ICICI Securities (ISec) said in its research report while commenting on the performance of cement sector.

Post the monsoons, demand picked up in most parts of the country. However, demand remained sluggish in Andhra Pradesh, Tamil Nadu, and Karnataka, where the monsoon sets in during October and November. Demand rose on account of robust housing activity and increased thrust on infrastructure development and industrial investment. Dispatches grew by a steady 6-7% for major players, and 15-17% for smaller players.UltraTech Cement is its top pick among the large cap cement manufacturers. JK Cement and Shree Cements are favored picks among mid-caps, the broking house said.

The broking house expects the bigger companies to report net profit growth of around 15-18%. Mid-cap companies are expected to show marginal improvement due to higher depreciation burden and interest costs. Further, due to their better cost efficiency and low-base capacity expansion, it expects them to register a 30-35% growth in net profit.

The broking house expects demand to remain buoyant on the back of increased housing activity, huge investments in infrastructure development, and large capex plans announced by major companies. However, it expects excess supply, after factoring in the delay in the capacity additions, put marginal pressure on prices. The northern and southern regions are expected to see higher impact on prices as capacity additions which are coming up will be higher in these regions.

The broking house believes that companies whose capacity additions have been commissioned recently would show higher volumes and emerge as sector outperformers. They include Shree Cement, Dalmia Cement, ACC, and Kesoram Industries. It remains positive on the sector from a one-year perspective as the demand-supply situation would remain in favor of the industry and help maintain price stability. Most of the large stocks are trading at low P/Es multiples (10x to 10.5x FY10E). Mid-cap stocks are trading at 6x to 7x (FY10E) and historically higher RoEs. It recommends a `Buy` on Shree Cements, JK Cements, UltraTech Cement and ACC.