Sushil Fin bullish on cement sector; picks 5 midcap stocks

The Indian cement makers shocked most of the people on the street by switching their orbits much ahead of their expectations, showcasing a complete turnaround performance for the quarter ended 31 December 2011. The cement sector had experienced a very difficult phase during most of the last fiscal and first half of FY12 on account of stumpy demand, elevated input costs, soaring interest rates and depreciating domestic currency. The situation was worsening as prices of key inputs in cement manufacturing such as coal and power kept towering. The bleeding cement companies were either working at stick-thin margins or were incurring losses. The stock prices were lingering around their all-time lows. Just an ideal time for investors to enter these stocks, we took the opportunity to initiate coverage on this sector with few highly undervalued cement stocks with a minimum upside potential of 30%. Since then the stocks have surged almost up to 60%.
 
The last quarter witnessed a smart recovery in the cement volumes which in-turn helped cement companies to pass on the rising input costs leading to expansion in their profitability. The surge in volumes driven by increased demand from infrastructure projects particularly from Government side and retail housing both in rural and urban areas led to improved utilizations which helped them partially offsetting high power, fuel and freight costs. Moreover, a price rise both in Northern and Southern regions after a long time was much awaited by the cement makers. Thus, higher realizations and improved volumes helped cement players to cloak a trajectory much above the street’s expectations. Reportedly, the cement industry experienced a 9% growth in despatches and an average price-hike of 20% per bag on Pan India base. The above factors led to rerate these cement counters in the stock markets which experienced a significant run post Q3 FY12 results. On the valuations front, we still believe these stocks to be undervalued, however, following the significant run in the recent times we advise existing investors to book partial profits and continue to hold the remainder as per their risk appetite till the next earnings season. The investors can still BUY OCL India with an upside potential of 20%
 
Going forward, we expect Budget 2012 to play a significant role in the industry movements. Cement manufacturers have been carrying many expectations from the Government. They recently requested the Government to abolish the existing glitch in the system where import duty on key inputs such as coal, PET coke and others is higher than on the cement itself. The existing excise rates are also much higher than other core and infrastructure industries and the cement producers are demanding to reduce excise duty from current 10% to 5%. Accordingly, any favorable move for the industry will set these stock prices on an upturn while any step against the industry is likely to bring a correction in the stock prices.    

JK Lakshmi Cement : We initiated coverage on JK Lakshmi with a BUY rating at a price of Rs. 42 on 25 October, 2011. Since then the stock has made a high of Rs. 67 witnessing a robust return of approximately 60%. We had changed our rating from BUY to HOLD on 03 February 2012 at Rs.55 following the stock price met our target price. We now advise our existing investors to book partial profits and HOLD the remainder as per their risk appetite.

JK Cement : We initiated coverage on JK Cement with a BUY rating at a price of Rs. 108 on 25 October, 2011. Since then the stock has made a high of Rs. 154 witnessing a robust return of approximately 43%. We had changed our rating from BUY to HOLD on 06 February 2012 at Rs.134 following the stock price met our target price. We now advise our existing investors to book partial profits and HOLD the remainder as per their risk appetite.

Mangalam Cement : We initiated coverage on Mangalam Cement with a BUY rating at a price of Rs. 101 on 25 October, 2011. Since then the stock has made a high of Rs. 156 witnessing a robust return of approximately 54%. We had changed our rating from BUY to HOLD on 06 February 2012 at Rs.123 following the stock price met our target price. We now advise our existing investors to book partial profits and HOLD the remainder as per their risk appetite.

Madras Cement : We initiated coverage on Madras Cement with a BUY rating at a price of Rs. 98 on 25 October, 2011. Since then the stock has made a high of Rs. 155 witnessing a robust return of approximately 58%. We had changed our rating from BUY to HOLD on 02 February 2012 at Rs.128 following the stock price met our target price. We now advise our investors to BUY at current levels with a 20% upside potential.

OCL India : We initiated coverage on OCL India with a BUY rating at a price of Rs. 91 on 25 October, 2011. Since then the stock has made a high of Rs. 125 witnessing a robust return of approximately 37%. We now advise our investors to BUY at current levels with an upside potential of 20%.

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