India: Cement Shares Expected to Slow Down Due to Sluggish Capital Growth

Recent market trends indicate a slowdown in cement shares, attributed to sluggish capital growth and a shift in investment patterns from mid and small caps to large caps.

India: Cement Shares Expected to Slow Down Due to Sluggish Capital Growth
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Cement companies have been notably affected by the recent downturn in major markets. This month has seen significant declines in small-cap companies like Visaka Industries, Andhra Cements, NCL Industries, Sahyadri Industries, and KCP, with decreases ranging from 11.5% to 19.7%. Conversely, large-cap companies like JK Cement, Dalmia Bharat, Ambuja Cements, and ACC experienced a milder pressure, marking a decline between 5 to 8% during the same period. This is in stark contrast to the Nifty-50's marginal decrease of 0.1%.

Vishal Periwal, an analyst monitoring the sector at IDBI Capital Markets & Securities, believes that the current downturn in mid and small-cap shares will exert pressure on cement shares. "The market is undergoing a significant change, with investors moving from mid and small caps to large caps due to profit-booking," said Periwal. This trend is expected to impact the cement sector as well.

Analysts predict that the upcoming general elections (scheduled for April or May 2024) combined with weak capital expenditure will soften demand and pressure cement prices, affecting the momentum of share prices. Manish Valecha of Anand Rathi Securities noted, "Implementation of infrastructure projects often slows down in an election year due to a halt in new order announcements and extended construction periods of existing orders. Additionally, cement prices typically face pressure in the March quarter due to weak demand and increased supply."

Retail prices have declined across regions, with a 1.4% drop in average cement prices across India from January to February, primarily due to price cuts in the Eastern, Southern, and Northern regions. South India recorded the highest price cut of ₹13 per bag, followed by declines in other regions. Despite monthly improvements in several areas, demand remains below expected levels.

IDBI Capital expects a 4.5% reduction in average cement prices on a quarterly basis in Q4 FY2024, with the sector potentially achieving an 8-10% annual growth. However, EBITDA growth could be impacted due to weakened prices.

As a strategy, analysts recommend investors stay invested in large caps and consider buying on dips, maintaining a positive long-term outlook for the sector. Periwal suggested, "Cement shares may not offer attractive returns in the short term, but they have the potential to increase investors' money by 15-20% in FY2025."


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