Cement Companies : Cartelization of Good Numbers

Shree Cement posted superb results today where its net profit multiplied 5.92 times YOY to Rs 228 crore vs Rs 38.5 Cr. The best estimates from the analysts was pegging it at 4.9x to Rs 190 Cr. Well, the stock has surprised the streets although it gone down after the results. I guess the phenomena of 'Buy on rumors and sell on news' is what has happened here and most likely all the cement stocks will face similar situations after their results.

If we look at the prices of the major cement companies in the past 1 month or so, we see that they have been outperforming the sensex by quite a margin. Ambuja Cements, ACC, Ultratech has been trading at their all time highs.

Stock	Price movement	Today's Price	Change %*
ACC	Low of 1285.15 on 6th Sept to a High of 1514.4 on 15th Oct	1445.7	17.83%
Ambuja	Low of 179.25 on 6th Sept to a High of 223 on 4th Oct	209.45	24.41%
Ultratech	Low of 1645.6 on 5th Sept to a High of 2074.95 on 12th Oct	2026.15	26.1%
Madras Cement	Low of 181.2 on 6th Sept to a High of 199 on 10th Oct	185.2	9.82%
Shree Cement	Low of 3282.6 on 5th Sept to a High of 4150 on 4th Oct	4057.85	26.42%
Grasim	Low of 2887 on 6th Sept to a High of 3478 on 16th Oct	3464.45	20.47%
J K Lakshmi	Low of 91 on 5th Sept to a High of 120.4 on 15th Oct	118	32.31%
Nifty	Low of 5217.65 on 6th Sept to a High of 5815.35 on 5th Oct	5648	11.4%

*The change% is as per the highest and the lowest price in the duration (Column 2)

So apart from Madras Cement, all the big cement firms have outperformed the Nifty in the last 45 days of the recent rally. These are the large players in the cement sector. Smaller players like Burnpur cement with a market cap of Rs 66 Cr has moved from Rs 5.85 on 6th Sept to a high of Rs 13.4 on 12th Oct, the day it reported its results. A mind boggling move of 129% in mere 26 sessions! The company reported a sales of 20.69 Cr (+176.97%) and a PAT of 0.92 Cr (+607.69%). Since then the stock has cooled down to Rs 10.55.

Several factors attributed to the current rally in the cement stocks.

• Short monsoon has given the infrastructure companies more days of work which lead to more demand for cement companies.
• Several projects getting cleared post monsoon thus spurring up the demand.
• The companies were successful in taking the price hikes at regular intervals which negated the negative effect of diesel price hike of Rs 5 which affects the cement companies as primarily the freight charges go up.
• The cement dispatches have seen an improvement of 6.9% over the previous year (Anandrathi reports) due to improved efficiency. The cement capacity of the country stands at 330 Million tonnes.
• With a slight revival in the economy and government's consistent push to infrastructure and construction sector, the capacity utilization has improved to 76%.

However, the picture is not rosy for everyone. While the northern India players have seen a good improvements in prices, the southern players have been marred by a price war between the new entrants, Jaypee and JSW, which has forced the other players in the region too, to succumb to price war in a sector which has little differentiation. So, while a 50-KG bag was priced above Rs 250 in North India a month ago, it was hovering around Rs 225-230 in south. In fact, some of the companies are selling their products at a lower price than the last year. Probably, that explains a tepid stock price improvement for Madras Cement which is primarily a south based player.

And probably these are the only stocks where some 'surprise elements' can be expected after the results. If, for example, we look at Madras Cement - It has recently expanded its capacity from 10.49 MTPA (Million Tonnes Per Annum) to 12.49 MTPA and will increase its captive power capacity to 157 MW from the present 112 MW. Both these factors will increase its topline and bottomline.

Another such company is Mangalam Cement which is trading at Rs 163.5 and has a Market Cap of Rs 436 Cr as per today's close. The company has a D/E ratio of 0.05 and an interest coverage ratio of 25.1. It has also been a good dividend payer of around 60% at a face value of Rs 10 (Rs 6) consistently for the past 3 years. The company has reported a sales of Rs 188.11 Cr in its June'12 Quarter with a PAT of Rs 26.27 Cr which was 135.2% of its June'11 result. QOQ it saw a jump of 45.6%. The present quarter result could be reporting PAT in several multiples as the company reported only Rs 0.68 Cr last year (Sept 2011). However, the stock has jumped from the levels of 122.25 on 4th Sept to the highs of 172.2 in today's session. A rise of around 41%. However, one can still find this stock relatively cheap going by the simple PE ratios (as on today) of other players.

Stocks	P/E
Ambuja	20.75
ACC	17.54
Ultratech	21.87
Shree Cement	18.66
Madras Cement	10.77
Mangalam	6.14

Courtesy: Capitaline.com

Thus, there seems to have further upside for the stock in the coming days, obviously depending upon the kind of result the company posts. The company is one of the Birla group companies and has a professional management.

There are several other cement companies, some major regional players, which can be looked into for a definite gain in this result season (Well, almost definite ;) ). Meanwhile, ACC and Ambuja are going to report their numbers on 18th Oct. Both the stocks have greatly appreciated in anticipation of a bumper result. However, of late both the stocks, particularly Ambuja, is looking exhausted and is loosing steam. A look at the chart shows that 209 is a strong support for the stock violating which the stock can go down to the levels of 202 or so. MACD is also showing a build up of negative momentum. However, with the results on day after tomorrow, the technicals may not be so reliable.

 Most analysts are recommending ACC and Grasim over Ambuja because of the stretched valuations of the later. Grasim is a diversified company holding cement as one of its major portfolios. Through its subsidiary Ultratech, it has a capacity of 52 MTPA and is expected to report superior results at the back of efficiency improvement in its VHF business.

Similarly, one can take a look at other small cap players like Birla Corp, Orient Paper, JK Cement etc too.

The likes of Shree Cement have set the stage for splendid results from the cement sector as was expected. The speculation game is going to get intensified in this sector as the result days for the companies draw near. For smart traders, the sector is going to give money both ways, depending upon an individual's strategy. :)

Companies	Results
ACC	18th Oct
Ambuja	18th Oct
Ultratech	20th Oct
Prism Cement	23rd Oct
Grasim	30th Oct