Cyclicals suffer a setback

B. Krishnakumar

AFTER a strong resurgence in 1999, cyclical stocks and companies in the commodity business suffered a setback in 2000.

The consolidation in the cement industry through mergers and acquisitions resulted in a sharp rise in the prices of cement companies during 1999. The pick-up in the demand for cement also fuelled the rally in share prices.

However, with the performance not matching expectations, the share prices of almost all cement stocks declined in 2000. Despite the sharp recovery in the last few weeks, cement stocks still find themselves on the losers list. The share price of Grasim Industries declined by 38 per cent, ACC by 40 per cent and Gujarat Ambuja Cements by 50 per cent.

Though cement prices firmed up in recent months, there was no significant increase in offtake. Given that the volume growth is not all that impressive this financial, the earnings growth for cement companies may not be significant. Moreover, much of the positive impact of the cement price rise would be offset by the rise in input costs -- fuel and freight costs, in particular.

In this backdrop, it would be safer to book profits and trim exposures in cement stocks. Fresh exposures may be contemplated on price declines from the current levels. Grasim Industries, Madras Cements and Gujarat Ambuja Cements would be best bets in the cement sector.

Price weaknesses in these stocks could be used to pick up exposures. India Cements shareholders could remain invested as the stock appears to enjoy a high degree of market fancy.