Will Cement Companies Continue Its Growth Momentum?

In a scenario where infrastructure and construction activities remained modest during monsoon, most of the cement stocks are on a rising trend touching their new highs.  What is that driving the stock to trade higher, will this trend continue or this rally will fade out sooner. Before we move ahead with the answer let us look at the cement stock performance in the last one month and YTD.  In the table mentioned below most of the cement stocks on YTD basis have given handsome returns from almost 25% to 100% and continue to outperform the market.

Companies	CMP	Returns (YTD)	Returns (1M)
ACC	1456	27.2	10.8
Ambuja cement	209.15	33.9	12.3
Ultratech Cement	2019	75.3	20.4
Shree Cement	4083	89.9	19.7
JK Lakshmi Cement	113	169.0	17.6
Madras cement	191.95	88.2	6.6
Heidelberg cement	51.1	102.0	18.7

Stock price of Shree Cement touched a new high of Rs 4083 on the Bombay Stock Exchange. Ambuja Cement touched a new high of Rs 209.15 is up 34% on YoY basis. Ultratech touched a new high of Rs 2019.90 Up by 75% on YoY basis. Most cement stocks gained 4-5% on an average today.

One of the major reasons for the cement stocks to move higher in the last one month’s is that cement prices have continued to surprise positively for the cement industry which have declined by just 2% in the September quarter which is far below our expectations of 5-6%. And now with monsoon reaching to its peak levels one can start expecting a reversal in the cement prices in the coming months. Infact as per one of the media reports cement companies have already raised the cement prices by Rs 5-6 on per 50Kg bag this month. This was largely done to offset the recent hike in the diesel prices by the central government. The hike in the cement prices has caused a sentimental rally in the stocks over the last two weeks taking the stocks higher by 10-15%. Apart from the price hike the rally was also on account of the report by credit Suisse which upgraded the outlook for the cement industry to positive. 

Will this rally sustain?
The Cement industry has shown a strong recovery in the last nine months after the low’s of 2011. Revival in demand from the construction and infrastructure activity, strong product pricing and production discipline has led to the strong performance. However due to monsoon which is cyclical scenario there will be some slackening in the demand in the September quarter. But with monsoons subsiding one can see a strong reversal in the demand as well as in the prices. Further with the hike in the cement prices the cost pressure will ease out leading to better margins. Therefore we believe with the strong production discipline and pricing power cement companies will continue to sustain their performance in the coming months.