With Prism Cement coming out with strong set of numbers has brought cement sector back in action. The second quarter results started on a positive note with Prism’s operating up a whopping 64.3% y-o-y to Rs 73.35 crore in the September quarter while net sales improved 21.1% to Rs 193.09 crore.

Its operating profit margin expanded and company's despatches in the September quarter were 5.73 lakh tonne when compared with 5.24 lakh tonne in the corresponding period of the previous fiscal. This has further accentuated the positive view in the sector which has been going through good times on account of demand supply mismatch. The industry is operating at almost 100% capacity utilization. With new capacities being added there are concerns over excess supply.  

Although there are short term woes but the future concerns are high. Capacity addition of 68% is expected in the next couple of years. Capacity expansion of 111.5 mn tones during FY2008-11 and most of the announced capacity would be commercialized in FY09 and FY10.

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.