Find out: Anand Rathi's top picks from cement space

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS CRISIL view: 3 sectors likely to see sharp falls in 2011-12 Book profit in cement post Q4 nos: Macquarie Capital ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Ambuja Cements BSE | NSE 30/05/12 Are Mutual Funds betting on Ambuja Cements? Other Stocks in this news ACC | Grasim Industries | UltraTech Cement | Coal India | Shree Cements | Madras Cements | Birla Corporation | Orient Paper and Industries |

In an interview with CNBC-TV18, Jaspreet Singh Arora, Sr Analyst-Institution Equity at Anand Rathi gave his readings and outlook for the cement sector.

He said, "We definitely have a buy on most of the cement stocks. Taking into account the current market prices and current valuations we are comfortable saying a buy on Grasim and UltraTech ."

Below is the verbatim transcript of his interview with Sonia Shenoy and Latha Venkatesh of CNBC-TV18. Also watch the accompanying video.

Q: What is your view on Ambuja Cement ? It has been quite expensive compared to its peers. How do you see the stock move from here post the numbers which were quite good?

A: The stock has already moved up quite a bit in the last one-two months from a price of Rs 130 to Rs 155. It kind of captures most positives that are flowing in either through the results or through the so-called buzz of a merger or the parent increasing stake.

Having said that both ACC and Ambuja, we don't see too much upside left in these counters maybe about another 5-10%. This is because of the huge valuations that they are currently trading at with respect to the current cycle of the cement sector.

Q: What is your outlook generally on the cement space for the coming quarters? They are not done with perhaps their problems of utilisation and capacity expansion as well the cost pressures are not going away? Do you think all that is factored in the price and you have a buy in any of the cement stocks?

A: We definitely have a buy on most of the cement stocks. Taking into account the current market prices and the current valuations we are comfortable saying a buy on Grasim and UltraTech and more importantly some of the midcaps where there is a huge valuation discount.

Q1 of current financial year which is FY12  there will be some bit of pressures starting with volumes dipping on a sequential basis, which is a normal trend, cost coming in full flow. this is because you didn't see the full impact in the last quarter, the coal price hike happened in the month of March and also there is a slight bit of pricing pressure in most parts of India barring south.

All these will have some pressure on the profitability and therefore year on year (YoY) declines maybe slightly higher versus what it was reflected in the yesterday's number. So, if it was about 10% lower number on YoY basis in yesterday's number, Q1 might probably be anywhere between 15-20%.

But if you look at Q2 which is September quarter, my guess is the number should be far encouraging on YoY basis. On quarter on quarter (QoQ) basis it will go down further because of monsoon and the same factors, volume being lower and prices being lower.

But, one has to keep in mind, September quarter last year was very bad in all factors, prices as well as volume front. The YoY profitability jump in the September quarter will be anywhere between 50-100%.

Q: ACC didn't feature anywhere on your buy list despite the fact that all of the cement majors have the same problems to deal with. Is it because ACC has been especially vulnerable to coal prices, the dependence has been higher and now with the way Coal India has raised prices its just nerve-racking in this stock. What would the call be?

A: That's true for ACC the impact from the Coal India price hike would be higher because they source more than anywhere between 40-50% from the linkage market. As compared to Ambuja or any other stock their impact will be higher. Overall their cost dynamics is also slightly heavy if you compare it with Ambuja or with the better ones like Shree Cement or Madras Cement .

But, I am also keeping into account the current valuation in mind and the decent stock run up. Though we have a fundamental buy in both ACC and Ambuja the current stock price doesn't leave too much upside for us to go and say buy.

Q: You said you like some of the midcap stocks. Are Shree Cement and Madras Cement your best picks?

A: No. It's a same story over there, price has run up so there is not more than 10% upside left in Shree though we are fundamentally very positive on that stock so where we have very good upside left and we have more fundamental upside left are two stocks namely Birla Corp and Orient Paper .

Q: One word on the cement prices and what you are expecting to see in terms of stability in prices?

A: Stability in prices, our estimate is it should continue for at least one more quarter which the current quarter, barring 1-2% pressure on prices. But, in Q2 there will be far more pressure simply because of the monsoon factor and volumes coming down.

So very broadly the so-called cooperation and understanding will continue for some more time. It's not going to be very easy to breakdown prices big time the way it happened in September-October last year.

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Hold cement stocks at current level