Cement shares obtained up to 12 % on Monday, led by hopes of a revival in demand between firm prices. Aiding sentiment was a report by international brokerage CLSA that had increased the goal of Grasim Industries to Rs 4,900 & termed it a conviction purchase.
“Grasim’s cement (69 % of FY14 earnings before interest, tax, depreciation and amortisation, or Ebitda) should benefit from a pick–up in the sector utilization rates driven by receding capacity surpluses, with a predicted demand pick-up. This should drive strong earnings growth for its subsidiary UltraTech Cement,” CLSA’s Vivek Maheshwari & Bhavesh Pravin Shah said.
“Margin pressure, with higher capex across key businesses pulled down Grasim’s return on equity to 10 % in FY14. The enhancement in margins, with higher asset turns, should expand return ratios to 14 % over 3 years. With peak capex behind, we expect Grasim to generate increasing free cash flow over FY16-17.” The up move in cement shares has been triggered by a price increase revealed from south-based companies, which experts say, can be sustained in case demand improves. Sunil Jain, vice-president – equity research at Nirmal Bang, says: “Capacity addition in the south will be lower compared to the others in two to 3 years. Therefore, if the need picks up, excess capacity in the south will get absorbed, which will give some costs power to players. Prices can sustain at these levels and move up.”
Demand dynamics
Experts expect the weakness in sector growth to continue for 6 months. Kamlesh Bagmar at Prabhudas Lilladher says the growth bottomed out in FY14, with the need growth being the lowest since FY02, below the gross domestic product growth.
“In requirement, the worst is behind us, with the easing of the sand-mining ban, clarity over the political uncertainty in Andhra Pradesh, the second-largest consumer state, % pent-up demand likely to drive growth. We expect gradual recovery in demand in FY15, with 7.2 % compound annual growth over FY15E-17E,” says Ritesh Shah at Espirito Santo Securities.
Investing strategy
Experts say one demand to be particular although making a fresh commitment since most shares have seen a healthy upside. A look at Bloomberg data show many shares are near or above their one-year target prices. Shah of Espirito Santo Securities retains ‘buy’ on UltraTech & ‘neutral’ on Ambuja Cements. “We have downgraded ACC to ‘neutral’ & Shree Cement to ‘sell’ on expensive assessments. We revise downward our fair value (FV) for ACC due to continued weakness in south. We expect UltraTech to increase on a par with the sector and it remains our preferred pick in the large-cap space.” For Ambuja Cements, Piyush Jain at Morningstar India pegs its FV at Rs 262 a share. Jain prefers UltraTech, India Cements and Dalmia Bharat in this space.
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