Cement stocks spiral 16-21% in last two months

Shares of cement companies have cracked double the key stock indices in the past two months. Unexpected poor demand, falling profits amid low realisation have put pressure on cement prices and have collectively taken a toll on cement stocks.

The sector which was heavily banked upon by market experts as a proxy for infrastructure development over the past year appears to have slipped back to reasonable valuations. Shares of major cement players - UltraTech, ACC, Ambuja and JK Cement - have lost between 16 and 21%. During this period, benchmark indices lost 8.6%.

UltraTech Cement, part of Aditya Birla group and India's largest cement maker is the biggest loser. After hitting an all time high of Rs 3,399 in early March, the counter has lost over one-fifth of its value and is currently trading at Rs 2,703, down 20.5%. The company witnessed a fall of over 3% in its cement sale volume in January-March quarter while its profitability dipped 24%.

Similarly, stocks of ACC, part of the Swiss cement giant Holcim, lost over 17% on the bourses during this period as the counter fell from Rs 1,775 to Rs 1,468. The company's net profit decline 41% in Q1CY15 while cement sales volume was hit harder as it plunged 10% year-on-year.

ACC's sister-concern company Ambuja Cements too could not escape. Following a poor quarterly performance wherein its cement sales took a hit of 9% while net profit was down 39%, stocks took a severe beating. After hitting an all time high of Rs 286.85, it corrected nearly 17% to trade at Rs 239.

Once these stocks have outperformed the benchmark indices with a wide margin. However, the pace with which they rose the fall too appears steep. According to sector analysts, further down movement in cement stocks can't be ruled out as demand situation looks grim.

Piyush Jain, equity research analyst at Morningstar India, said, "The anticipated demand pick up is clearly missing. Construction activities are yet to start which will further delay growth in consumption. I believe, the corrections in the sectoral stocks were overdue and they are currently back to their realistic valuations. However, going forward there could be lower entry points for investors."

Falling rural income and no changes on the ground despite being almost a year since Narendra Modi-led BJP government came to power are likely to pose challenges for the cement sector which has been struggling for almost half a decade now.

Mismatch of supply and demand will continue to put pressure on cement companies' operating margins. Against an overall capacity of 380 million tonne per annum (mtpa), India's current cement consumption is not more than 285 million tonne. This has led to fall in capacity utilization to about 72% while cement companies continue to lose control over pricing.