Sector looks good : Cement

 Three big cement stocks –ACC, Ambuja Cement and Ultratech have outperformed the Sensex by 22 -29% since August 2011. However, it seems that performance of these stocks is not in line with fundamentals of the industry.
 The industry is witnessing a scenario of weak demand for the product, increasing capacity addition and falling capacity utilisation.
 It seems that cement demand recovery is not yet in sight as weakness is seen most of the cement consuming sectors. Profit margin of cement companies is under pressure and the industry is not in a position to hike cement prices because of the rising threat of government intervention. In this scenario, premium valuations of cement stocks are unjustifiable.
 It seems that stock prices are anywhere close to 2007 peak levels, but industry fundamentals are nowhere close to that of 2007.
 Factoring deteriorating fundamentals of the industry, ‘reduce’ rating is assigned to ACC and Ambuja Cement while Ultratech is recommended to ‘hold’.
 Also recommended to reduce exposure in to the sector as current valuation of cement stocks is at heavy premium.
 It seems that ACC is at higher risk of volume and price declines as it has the highest exposure to the southern region.
 Ultratech is recommended to hold on as the company is expected to benefit from volume growth from its capex getting commissioned by FY14.
 Capacity utilization in the industry at multi – year low and any breakdown of co-operation among producers may lead to sharp decline in cement prices.
 Any unfavorable result of the ongoing investigation on cartelization also poses a threat to premium valuations.