India Cements: Sell

Recommendation: Sell

S. Vaidya Nathan

INDIA Cements shareholders could use the recent run-up in prices, which may be of an unsustainable nature, to pare exposures in the stock.

Within the cement sector too, exposures can be contemplated in stocks that have a higher degree of operational efficiencies and financial strength. And that too only after the recent euphoria over cement stocks dies out.

Cement stocks have risen largely on the back of a sharp spurt in cement prices across the country. This is despite sluggish volume growth in the first eight months of fiscal 2000-01. There has been barely any volume growth so far this fiscal.

This is a combination of a demand slowdown and the effect of a deliberate and calibrated cut in supplies by the cement producers. The latter is to artificially maintain a high price level. This has happened across the country with prices going up anywhere 40-100 per cent in the last few months depending upon the regional markets.

This trend first began in the markets of Tamil Nadu, Andhra Pradesh and Kerala. The notable fact about this price trend is that even last year, when there was good demand growth, prices were high for just a few weeks and then retreated to the long term average. The failure of the North-East monsoon in many parts also helped the firm trend as construction activity could continue for this reason.

The spurt in prices despite the absence of demand growth was brought about by tight supply-side management involving volume caps on companies, a long period of maintenance shutdown and a week off from production next month. But the resistance from builders is building up and raises more doubts about the sustainability and longevity of the current trends.

In the quarter ending December 31, 2000, all cement companies may have a better report card compared to the corresponding previous period and the immediately preceding quarters. India Cements may be no exception though the degree of earnings growth may not be as sharp as the uptrend in cement prices. The lower volumes may neutralise the uptrend in cement prices.

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The improvement cash flows may remove the stress on the debt-laden balance sheet of India Cements to some extent. But unless the current price levels are sustained for a long period, the debt burden and highly priced acquisition of Raasi Cements may continue to shadow the earnings stream.

There is also the build-up of capacities courtesy of Grasim, Larsen and Toubro and Madras Cements. The latter plans to double capacity over the next couple of years to close at 6 million tonnes. All this will have a bearing on price levels and profitability sooner or later.

While Madras Cements and Grasim Industries score high on the efficiency count, despite improvement in recent years and more in the next few years, India Cements profitability may not match the best. In this backdrop and on the question of sustainability of cement prices, investors can use the recent uptrend and, more particularly, any further rise in the wake of October-December quarter earnings announcement to pare exposures in the stock.