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Bullish outlook for cement firms on back of higher prices

Deeptha Rajkumar

`There is scope for prices to rise by Rs 20-25 a bag across the country'

Mumbai , July 11

Led by higher cement prices, the cement sector is poised to deliver strong profits. And after good monsoons, analysts expect prices to commence their upward spiral once again.

The counters of Grasim Industries, ACC, Gujarat Ambuja, Shree Cement etc, have seen 10-15 per cent rise month-on-month on the bourses. On Tuesday, Grasim closed at Rs 1,954.70, up 1.20 per cent, while ACC closed at Rs 818.35 (one per cent), Gujarat Ambuja at Rs 105.70 (2.42 per cent), and Shree Cement at Rs 882.20 (five per cent), on the BSE.

While frontline stocks continue to do well, Grasim's profit growth is expected to lag other cement majors due to poor sponge iron sales and marginally lower VSF profits.

At these levels, market analysts peg Gujarat Ambuja and Shree Cement as attractively valued.

Piggybacking on the sustained uptrend, analysts are looking at an EBITDA growth of nearly 100 per cent for the quarter ended June 2006 and a 45 per cent growth quarter on quarter.

Broking house DSP Merrill Lynch is of the view that for most of the majors, EBITDA will rise by Rs 15 a bag quarter on quarter, because of higher cement prices. Volumes are pegged to grow by 7-9 per cent year on year, but stay flat to weak quarter on quarter.

However, there is speculation in the market that cement prices are all set to peak on the back of the sustained uptrend. Analysts maintain that there is scope for cement prices to rise by around Rs 20-25 a bag across the country in the long term.

According to analyst Mr Satish Kumar at Brics Securities Ltd, peak prices should be at parity to landed price of imported cement, which works out to around Rs 280 a bag in Mumbai.

"This corresponds to a weighted average of Rs 220-225 a bag for the country. Given that cement is currently trading at Rs 205-210, there is scope for prices to rise by a further Rs 15-20, at least over 2007-08."

Commenting on the long-term prospects, analysts said that there should not be any steep decline in cement prices over the next 3-4 years. Historically, cement prices have always declined when average capacity utilisation over three months has fallen below 78-79 per cent.

"We don't expect average capacity utilisation to fall 82-83 per cent for any three-month period, at least over the next 3-4 years. But capacity utilisation is expected to decline after reaching a high in 2007-08, so prices in 2008-09 are unlikely to be as high in 2007-08. We expect utilisation in 2008-09 to be more or less the same as in 2006-07. This means prices in 2008-09 would be similar to those in 2006-07 (Rs 200-210)," Mr Satish Kumar said.

Rising cement prices are now a global trend. Market participants argue that cement prices have been on the rise in West Asia and South-East Asia, making it increasingly difficult for companies to source cheap cement.

Given the uptrend in prices of crude oil and the firmness in energy prices, analysts believe that the base price level should rise to $45-47 a tonne in the quarters ahead.

"Globally, prices should be stable for the next year. However 2008-09 will see a lot of new capacities come up in West Asia, which could bring about a downturn in prices," Mr Kumar said.

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