In today’s correction along with metal, realty and pharma, cement stocks were among the top beaten down stocks. Among the frontliners ACC & India Cements each down over 5%, Ultratech Cements down 4.5%, Grasim was down over 3%, Ambuja Cements down 1.5%. Mangalam Cement was down 9%, followed by Deccan Cements, Birla Corp, JK Cement, Madras Cement were down nearly 5% each. Saurashtra Cement, India Cements, Mysore Cements, Ultratech and also ended in the red.

Cement stocks have become very vulnerable, as there are concerns of capacities being added in the near future. Cement industry is expected to witness large capacity additions by Mar ‘09E. The cement industry is witnessing extremely tight supply-demand with the industry’s capacity utilization averaging 97. Despite intermittent risks of government intervention, cement prices and profits of cement majors continue to trend upwards due to continued strong demand and lack of any new supplies. But 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

According to Merril Lynch research report, “The industry’s supply-demand tightness to continue for the next 6 months & foresee short-term upside triggers for cement shares due to two factors: 1) we think producers’ will seek strong cement price hikes through the upcoming construction season (Oct ‘07 onwards), barring risks from early elections; 2) commissioning schedule of new capacities will become more visible to the market only later in the year (Dec ’07 onwards). On a 12-month horizon, we are worried that the industry’s large capacity pipeline will mostly materialise by Mar ’09 leading to pressure on cement prices from 2H FY09 onwards.”

The brokerage is bullish on Grasim and has a buy rating on the stock with a target price of Rs 4450 but is neutral on ACC.

The near term scenario is expected to be positive for cement stocks as price outlook for October remains positive with Rs 5/bag hike expected across regions. With second quarter results around the corner Edelweiss expects sequential growth in realizations to be healthy for southern players and flat for others. Volumes are likely to soften sequentially due to monsoons with an average decline of 8% Q-o-Q in Q2FY08E. Core earnings are likely to be under pressure sequentially for pan-India players, due to a combination of muted realization growth and lower volumes; it expects an average decline of 7% Q-o-Q in Q2FY08E. EBITDA margins are, however, likely to be maintained.