Significant upside hinges on demand revival in cement industry: Analysts

The cut in corporation tax rates is giving some respite from the weak sentiment that prevailed towards cement companies. The stocks of UltraTech Cement, Shree Cement, ACC, and Ambuja Cements have gained 12-15 per cent in the last two trading sessions, given that most of them paid tax at the rate of over 30 per cent in FY19. 

 
Analysts say the benefits of the rate cut may flow to the bottom line of these companies, or they can utilise the savings towards funding expansions to drive future growth. However, the key is a recovery in cement demand and prices.

 
The welcome relief comes at a time when demand remains unsupportive. Cement prices have continued trending down month-on-month since the start of the year as demand remained elusive. While the general election affected cement companies during the April-June period, monsoon kept demand soft in the September quarter. Not surprising, stock prices of the above mentioned large players, too, had corrected up to 20 per cent till Thursday from their May-June highs. A few days ago, Credit Suisse, too, had downgraded many cement stocks as the foreign research house said that demand weakness would drive downside.

Among the reasons for muted demand growth is slowing public expenditure in marquee sectors like roads and railway, and it will take time to attract private investment, say analysts. Further, there are risks of the government curtailing spending to limit the fiscal impact. 

The urban housing demand is still weak, with huge inventory awaiting liquidation. In this backdrop, demand growth estimates, too, are tweaked by analysts. Credit Suisse expects 4-5 per cent price growth and nil demand growth in FY20.

 
Though the move to cut taxes can push the weak industrial investment activity, it needs to be watched for. The Street will also keep an eye out on rural demand recovery and further push from affordable housing schemes. 

 
Analysts, however, say any demand recovery can happen after the festive season, which impacts labour availability, and thus demand recovery still may be some time away. Sanjeev Kumar Singh at Emkay Global feels demand recovery holds the key now for any earning upgrade. Meanwhile, among stocks, UltraTech being a pan-Indian player with expanded capacities stands to gain the most from any demand recovery and thus, is among top picks of most analysts post the corporation tax rate cut.

 


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