Cement Stocks

Why are the markets celebrating them in March…?

For years, these cement stocks have been the stars of a bygone era. After peaking out in 2007, the cement industry has been plagued with excess capacity and weak pricing power. The budget seems to have changed that sentiment to a large extent. Stocks like ACC, Gujarat Ambuja and Ultratech have shown smart gains since the budget. In fact, there are three distinct factors that are responsible for this revival in interest in cement stocks.

Pricing power in North India…

 There has been a sharp increase in cement prices across North India and parts of Central India. The increase per bag has been quite substantial. This has benefited companies that are based out of the North or having substantial operations there. Pricing power also seems to be a function of a prolonged period of excess capacity when cement manufacturers did not have the pricing power. With the regional demand supply gap picking up, the prices have started firming up. It may not be too long before other regions like South India also follow suit in hiking prices.

Budget boost for housing…

It needs no reiteration that a chunk of cement demand still comes from the construction industry. To that extent, demand for cement is a function of housing demand. This budget has been quite positive for the housing industry in a variety of ways. Firstly, it has given a big boost to low-cost housing through income tax and service tax breaks. This is likely to boost the demand for cement. The government has undertaken a massive project of infrastructure expansion in this fiscal year, which will also give a substantial boost to cement demand. Lastly, the encouragement to REITS is a major positive for cement companies. Demand for cement was subdued as most real estate companies were deep in liquidity problems. The introduction of a tax-friendly regime for REITS will help many large real estate firms to monetize their assets and expand their real estate portfolios. This is again a positive for cement stocks.

Amending the MMRDA Act…

But the big silent push for cement stocks came from the MMRDA Amendment Act. This modified Act, that was passed last week, permits transfer of captive mines. Till now only mines acquired through auctions could be transferred. By permitting captive mines also to be transferred, it will give a big boost to mergers and acquisitions in the cement industry. Mergers involving large companies like Ultratech and Jaypee were held up due to this clause on captive mines transfer. Now, there is likely to be a surge in M&A activity in cement. So capacity gets rationalized, costs get cut and cement stocks emerge as a new value proposition! ©

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