Deeptha Rajkumar

Mumbai , Aug. 16

DESPITE concerns over the disparity in the demand-supply scenario in the south impacting the fortunes of the cement sector as a whole, a section of the market continues to look on it as a profitable cyclical story.

There are those who believe that going forward, in the financial year 2005, one could see a 15-25 per cent upside in cement counters ACC, Gujarat Ambuja Cement and Grasim.

"The demand-supply dynamics for the sector have completely changed. Going forward, this should be a good year for cement companies," an analyst tracking the sector said.

A Morgan Stanley report on the cement sector stresses its bullish stance, stating that it expects a pick-up in demand growth (from 5.8 per cent in financial year 2004 to 6.3 per cent in FY05 and 7.8 per cent in FY06).

It also expects a slowdown in supply (a CAGR of 4.9 per cent in the capacity of large efficient plants in FY05-06) to take prices up seven per cent year-on-year in FY05 and YoY 3 per cent in FY06.

The perception being that increasing blending and high utilisations should help players boost margins.

Analysts are also confident that one will see a recovery and growth in demand in the South, as infrastructure spending picks up particularly in Andhra Pradesh and Karnataka.

The decline in demand in the South can be attributed to change of Government in both the said States and failure of monsoon for the second consecutive year in AP.

Market sources said that though infrastructure spend contributes to only 35 per cent of demand, the slowdown in spending has impacted margins adversely.

However, there are those who prefer to take a more cautious stand. "At a pan-India level, demand-supply parity is still far off. While there is no denying that there exists a parity in the demand-supply scenario in the northern and central region, in the Western region, exports have been a crucial factor in maintaining status quo.

"As for the South, given that this is a freight intensive industry it is highly unlikely (in spite of oversupply) that cement will move from the region to the north. Prices could weaken in the South," an analyst with a leading domestic brokerage said.

Sources maintain that while cost push will be significant in FY05 vis-à-vis FY04 due to higher fuel and coal prices, there will be net improvement in profits and margin expansion.

"This, however, will be much below market expectation," an industry watcher added.

Though bullish on the sector, many are of the view that given the recent run-up in prices - 21 per cent in the last six months) one could expect a marginal correction in prices this year.

The stock of ACC ended lower at Rs 260.50 (on the BSE) with around 7.82 lakh shares traded, while on the NSE, it witnessed a volume of 24.36 lakh shares ending the day at Rs 260.55.

GACL on the NSE closed at Rs 306.60 with around 9.13 lakh shares traded.

Grasim ended at Rs 1027.80 on the NSE with around 1.77 lakh shares traded.

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