The day belonged clearly to cement stocks that were in limelight as the FM there was no freeze on cement prices.

Investment Advisor, PN Vijay was very impressed with the Finance Minister’s statements. “I was not one of those people who became a gloom and doom prophet in February- March, when most brokerages viciously downgraded the cement sector. As things have turned out, the operating results of cement companies and their pricing power is not as bad as analysts thought. The Finance Minister was stating the obvious, when he said that after 17 years of reforms we do not fix prices of products. As FM he has to say it, because in this economy the government cannot fix the prices of products. I think that did give a shot in the arm to pessimists who had written that sector off for sometime,” he added.

But there are some near term concerns the industry is facing currently. Firstly, cost could rise as international coal prices have risen significantly recently but this will be neutralised by price increase. Secondly the concern over importing cement from Pakistan but this faces logistical bottlenecks making imports unfeasible.

There seems to be a concern of oversupply going ahead. The supply in the industry in FY07 is expected to be 170.4 million tons, 208.7 million tons in FY08 244.4 million tons in FY09. The demand during the same year is expected to be 170.1 million tons in FY07, 188.5 million tons in FY08 206.7 million tons in FY09. So clearly in the next fiscal we see supply more than the demand. The cement majors are expected to operate at 85% capacity utilization.

SP Tulsian is not bullish on the sector as the players will loose their pricing power as new capacities will be added by the year end.

But on the positive side Q1 earnings are expected to be a positive surprise realizations are expected to grow by 3% Q-o-Q. According to UBS research report, earnings estimates indicate possibility of 31% YoY PAT growth for GACL (but 46% PBT growth), 48% PAT growth for ACC, and 39% PAT growth for Grasim (standalone). The demand for cement is strong and is expected to grow at a rate of 10%. India’s per capita cement consumption is only 125 kg as compared to China has 800 kg. China is the biggest cement manufacturing country followed by India.

The industry is operating at almost full capacity and expansion plans that result in new capacity creation will materialize only after four or five quaters. This will lead to demand-supply mismatch in the short term.

Brokerage house Macquarie and Anil Singhvi, Partner, Notz Stucki are bullish on the sector.

According to Singhvi, “The sector is completely undervalued. Most cement companies are trading in single digit PEs based on their next year earnings and the broad market is about 16 times while the cement sector is trading at about 9-10 times. The concerns on capacity are hugely unfounded and I don’t think that with this kind of economic growth, cement will continue to grow at around 11-12%. I do not think that the capacity is so large that we will see a reversal of cement fortunes.’

Macquarie has recommended outperform rating on Grasim Industries and Ambuja Cements with target price of Rs3,215 and Rs168 respectively.