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Recommendation: ACC: Hold/Buy on declines Gujarat Ambuja Cements: Hold Madras Cements: Hold India Cements: Hold and sell on rise Grasim: Hold L&T: Hold and sell on rise

THE stock price performance of cement stocks has been volatile in the last week. They have been witnessing periodic spurts with indications of increase in cement prices, only to retreat later. From the medium-to-long-term perspective, investors looking to profit from improvement in fundamentals need to focus on a small universe of stocks — ACC, Gujarat Ambuja Cements, Madras Cements, Grasim, India Cements, and Larsen and Toubro. None of the other players is likely to be in a position to deliver sustained good performance.

From the short-term perspective, companies with 1-2 million tonne capacities may periodically be in the limelight on takeover-linked possibilities. But investing in such stocks on this premise can be a high-risk approach. Had one invested in these stocks two-three years ago, not only have takeovers not fructified, but the stock prices have also headed lower as industry profitability has suffered.

But over the next two-three years, further consolidation is likely. And it is companies with capacities of 1-4 million tonnes of more recent vintage that could be in the news. Stocks of companies such as Jaiprakash Industries, Shree Cements, Prism Cement, Priyadarshini Cements have in the past moved up on takeover-linked speculation and then beaten a retreat.

In any case, given the present price levels, investors in these stocks can stay on for now. As for frontline stocks, institutional investor interest seems to be concentrated on ACC and Grasim Industries which figure as the prominent cement sector exposures. Though Gujarat Ambuja has attracted foreign investors for Ambuja Cement Holdings and its own Euro Convertible offering, it has not figured prominently in fund portfolios in the Indian context.

Suitability: Existing and would-be investors in stocks of cement companies should look actively for profit booking opportunities from time to time. A buy-and-hold approach will simply not work in this sector. The price behaviour of cement stocks across the board suggests that such an approach in the last seven years would have only led to value erosion. So notch profits if there is a 25-35 per cent move in prices and evaluate positions later.

ACC: Profitability could rise with improved efficiencies and better volumes. The company has commissioned a 2 million tonne unit in Wadi that could provide for aggressive volume growth in 2002-03. It is shedding some non-core business, which could free cash flows. Due to considerable and recent institutional interest, volatility could be high in the ACC scrip. Active profit booking is a must to reap returns from investment in this stock.

Gujarat Ambuja Cements: It continues to score high on operating efficiencies, volume growth and healthy cash flows. It has also cut its debt burden sharply, and quickly, after an acquisition binge. The company is well placed to pursue growth through acquisitions and by shoring up the stake in ACC once the open-offer-linked requirements of the SEBI Takeover Code cease to apply.

Madras Cements: It continues to pursue growth through greenfield units — a strategy that may have better pay-offs for a regionally focussed player. Operating efficiencies continue to be good though it has to cut back on production in the face of sluggish demand. If demand growth does not pick up in Kerala and Tamil Nadu, earnings could be under pressure even as the company seeks to expand capacities to around 6 million tonnes.

India Cements: After a spree of acquisitions in the late 1990s, the company is saddled with debt of around Rs 1,500 crore. This is after the reduction in debt using cash flows from the sale of Shree Vishnu Cements. The debt burden, limited room for replacement by equity and comparatively lower operating profit margins will continue to drag profitability levels.

L&T: It now has the largest capacity in the country. But its cement businesses may take some more time to contribute positively, and in a sustained manner, to profits. It has a diversified business profile and continues to be well placed in engineering and construction. But following the acquisition of stake by Grasim, the restructuring moves are likely to be set back in time. Restructuring contours are also uncertain. These could dampen the stock's valuation.

S. Vaidya Nathan

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