Cement cos to see margin pressure: Karvy

Amit Shrivastava of Karvy Stock Broking expects margins of cement companies to be hit. 

"Cement realizations would stabilize at current levels. But going forward, realizations should go down. With incremental capacity coming on stream and supply exceeding demand, you have to decrease prices. The level of price decrease is around 5-6%. It also depends on how much excess supply is coming in. On the other hand, cost is rising which cannot be passed on. So going ahead, companies are definitely going to get hit on their margins."

Excerpts from CNBC-TV18's exclusive interview with Amit Shrivastava:

Q: What are your own estimates of realizations and the margin picture of cement companies in the current quarter and for the rest of this year?

A: This quarter, realizations would stabilize at current levels. Going forward, realizations should go down, as demand is not robust during monsoons. In that scenario, you have to decrease or stabilize prices. With incremental capacity coming on stream and supply exceeding demand, you have to decrease prices.

The level of price decrease is around 5-6%. It also depends on how much excess supply is coming in. On the other hand, cost is rising which cannot be passed on. For instance, fuel, coal, transportation, and packaging costs have increased. So, going ahead companies are definitely going to get hit on their margins.

Q: Geographically, which are the spaces you would bet on? Would you like Shree Cement on the western geographies? Would you be betting on a stock like India Cement? Which of the markets look attractive in terms of a stock-specific selection?

A: If we look at it geographically, they there a six months to 1-year lag in the southern region. This is because in the northern region most of the capacity is new which as expected has already commissioned. The incremental capacity supply will start in this quarter or maybe the next quarter. But in the Southern region, the new incremental supply will come up in the beginning of FY10.

So, at that time, there is a lag effect of 6-9 months for the cement stream of the southern region. That is why India Cement is better than Shree Cement on that perspective if we look at the realization fronts. 

Q: We saw some buying in the cement stocks in the last 48 hours or so. Are you a buyer in this space? Do you think you will get more attractive valuations to buy? What are the stocks you are picking up other than India Cements?

A: We look at the industry on two perspectives: the fundamental perspective and on the possible triggers in the industry. On the fundamental side, we don’t see any reasons to buy at current levels.

But there are certain regions like positive triggers, which are expected in the industry. It will give the short-term bounceback in the industry. The first is a consolidation in the industry. All the companies are sitting on huge cash which is giving them the opportunity to buy other companies on lower valuations. So, if you want to target then this is the right time to buy the business. But from an investor's perspective, this is a short term bounce back which is not going to sustain in a long-term perspective.

The second thing is acquisitions happening. If the promoter has the lower stake, they are increasing it because they are getting at a lower valuation. So, these are the likes of possible triggers of the companies.