Investment outlook: Caution needed

Recommendation

ACC: Hold

Gujarat Ambuja Cements: Hold

Grasim: Hold

Madras Cements: Pare down exposures

India Cements: Pare down exposures

Larsen & Toubro: Sell and re-enter at lower levels

S. Vaidya Nathan

IN THE last two-and-a-half years, stocks of cement industry players have had three bursts of uptrend and decline.

The first of the bullish phases was when the cement industry clocked a 15 per cent volume growth in 1999-2000. But the subsequent uptrends have been linked to increases in cement prices.

After the second quarter of 1999, the fortunes of cement stocks have ebbed and flowed with the trends in cement prices. This clearly points to a tenuous valuation of these stocks and indicates the need for caution on the part of existing and would-be investors in the sector.

Suitability: As with all economically-sensitive stocks, cement sector scrips are highly cyclical. This is despite the fact that it is perhaps the only major commodity sector where there is no threat of imports, as of now. It has also not had problems of enhanced global exposure faced by other commodity sector companies.

Even without this element, the price trends are cyclical enough to suggest that a `buy-and-hold' strategy will not pay. Investors would have to book profits even in frontline stocks regularly, and, if necessary, re-enter at lower levels.

*For the frontline stocks considered here, the presence of institutional investor interest or holdings by default make for volatility. Only investors comfortable with such risks ought to consider taking exposure.

*Stock perspective: So, how do the frontline stocks look from an investment perspective:

*Volume growth could be a double-edged sword for L&T as it has managed profits in its cement business only in the last three quarters. If prices do not return to the highs of 2000 and early 2001, the company's profitability could be stressed. At around 20 times the historical earnings and even more expensive on forward earnings, the L&T stock is stiffly valued. Shareholders should use uptrends to book profits and look at re-entering at lower levels.

*India Cements may well find the pressure of its debt burden casting a big shadow over earnings growth. There has been a spurt in its stock price and of the sister concern, Shri Vishnu Cements. Speculation has been rife that the latter may be sold to generate cash flows to reduce debt. Without the benefit of higher prices, the interest burden may take a bigger toll on profitability than in 2000-01. Shareholders could cut exposures in the company.

*Madras Cements has gone the greenfield way to raise capacities. The capacity is slated to go up to six million tonnes. Despite the company's high operating efficiency and strong cash flows, the earnings growth could remain stressed in the next year or two due to financial charges.

Shareholders can consider paring exposures in the stock. But re-entering at lower levels should be considered as the company continues to be one of the two most efficient players, and over the next three years would have volume growth as well.

*ACC and Gujarat Ambuja Cements merit a position of hold as they have been posting strong volume growth. In the last three months, the two companies have seen volumes grow at close to three times the industry average. In ACC's case, there is room for efficiency gains and in this backdrop investors can stay invested for now.

*Grasim Industries could well have a difficult year with the sponge iron business likely to cast a shadow. But this appears priced-in in the stock's valuation. The earnings growth may not show any notable improvement this fiscal given its diversified commodity business profile. But investors could wait for some improvement in the valuation levels and, therefore, stay invested for now. A 15-20 per cent move in prices could be used to book profits in the stock.