Sell ACC and Ambuja Cements, says Nirmal Bang

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Sell ACC and Ambuja Cements, says Nirmal Bang

Amit Srivastava, cement analyst of Nirmal Bang says, he expects cement demand to pick-up ahead. According to him, ACC and Ambuja Cements are trading at very expensive valuations. “We are recommending to sell these stocks at these levels.”

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » 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 ACC BSE | NSE 29/05/12 Are Mutual Funds betting on ACC? Other Stocks in this news Ambuja Cements | UltraTech Cement | India Cements |

The demand in the cement space has been at it's lowest in over a decade. In an interview to CNBC-TV18, Amit Srivastava, cement analyst of Nirmal Bang says, he expects cement demand to pick-up ahead. "We are expecting that demand would improve going ahead."

According to him, ACC and Ambuja Cements are trading at very expensive valuations. "We are recommending to sell these stocks at these levels."

Also read: ACC Q2 net up 85% on better realisations

Below is the edited transcript of his interview. Also watch the accompanying video.

Q: The demand in the cement space has been at it's lowest in over a decade. Do you see some amount of pick-up taking place anytime soon?

A: If you look at cement demand in the last six months or one year time, definitely it is lacklustre. It is not improving at all. It is growing at 3-4%, when there is expectation of 8-9%.

Going ahead, we will see a pick-up as we see peak sale cycle of the season. So, we are expecting that demand would improve going ahead. As this is the month where we have a higher base, the demand growth in October won't be great, it could be around 2-3%.

For the November, December and January, we will see there would be lower base. On that basis, there will be improvement in demand. But still it is very much lower than the benchmark demand growth, which we were expecting, around 8-9% or 10% for the year.

Going ahead, we are expecting that demand would improve, but there is no drastic change or a structural change on the demand side for the industry in the near-term. So that is the very important factor for the industry because that will give you the bargaining power for the cement industry.

Right now, we are going in a very tough phase on the demand side. So, it is impacting their capacity utilisation as well.

Q: What's your call on Ambuja and ACC?

A: ACC, Ambuja, if we look at on a top-line growth, they have given very decent numbers. But once you look at that bottom-line, definitely their numbers, on a year-on-year basis, are very much good, but overall on a sequential basis they have declined.

Major factor, which is playing, is the EBITDA level. On a sequential basis, they have decreased their capacity utilisation to match the cement prices in the industry which has impacted their operating leverage. And that's why their EBITDA margin has gone down significantly. And that has impacted the overall profitability number.

That is going to be played, if the demand is not going to improve in the near future. So that means your capacity utilisation is going to be lower. When you have a fixed cost of around 25-30%, that will impact your EBITDA margin overall for the industry. That's where we are very much concerned about the sector as a whole.

Ambuja Cement and ACC are trading at a higher valuation. If you look at Ambuja, it's trading around per tonne of USD 170 and ACC is around USD 140-145. That is the peak valuation. When the industry valuation was in the boom phase, at that time the ACC, Ambuja were trading at that kind of valuations. That's why we are recommending to sell these stocks at these levels.