Analysts bullish on cement stocks despite CCI penalty

Moneycontrol Bureau

Cement company stocks are on an uptrend despite the Competition Commission of India (CCI) slapping a Rs 6000 crore penalty on them for forming a cartel. Analysts say, sector stocks are likely to see a correction as companies have left the CCI order overhang partly behind by deciding to contest the order.
Cement stocks of companies like ACC Ltd, Ambuja Cements, J.K Cements and UltraTech, Madras Cements and J.P Associates declined anything 3-5% following the CCI order in the last week of June. However, since then, stocks have recovered from losses they made and are now in green.
After reviewing the situation post the CCI order, analysts are maintaining a positive outlook on cement sector because there will not be an immediate drag on the respective company balance sheets due to the ongoing tussle between the CCI and cement makers. CCI in its order said the penalty would be at the rate of 0.5 times of profit earned during FY10 and FY11.
Despite the unfavourable order passed by the CCI, brokerages are bullish on sector stocks.
Ravi Sodha from Elara Securities says, "Overall the cement industry has been able to get better realisations which has lifted their profits. If you see various capital ratios in terms of return on capital employed, return on net worth, all these have improved significantly over the past few quarters." He also believes that from the investment point of view, stocks might see further correction on further progress on the appeal that cement companies will make to the appellate authority."
Religare Institutional Research also believes that the CCI overhang is not a bigger concern for the sector in times to come. Analysts from Religare in a report say that the firm is remains positive and recommend that investors accumulate cement stocks on a seasonal correction during the monsoon if any. The firm has assigned a 'hold' rating on ACC stock with a target price of Rs 1400, Ambuja has a target price of Rs 195 with a 'buy' rating and UltraTech too is a 'buy' with a target price of Rs 1740 according to the firm.
Dipen Mehta, member-BSE/NSE recently told CNBC-TV18 that cement stocks have become consistent performers as we have seen over the past few quarters, but this particular order of the CCI certainly soured the sentiment in the sector. And I would just like to put the entire sector on hold for the time being and look for buying into these stocks only if there is a further 10-12% kind of a correction and there is greater clarification or atleast some further progress on the appeal as far as the industry is concerned.