Cement sector: Religare Cap bets on 2 largecaps; 2 midcaps

In an interview to CNBC-TV18, Mihir Jhaveri of Religare Capital Markets says cement prices will start to increase, from the first week of January, with the busy construction season setting in.

His top picks have been Ambuja Cement, and Ultratech Cement in the largecap space. In the midcaps, he likes JK Lakshmi Cement and Shree Cement. Also read: Margin may decline in Q3, says JK Lakshmi Cement   Below is the edited transcript of his interview on CNBC-TV18. Q: What is your on-ground situation? What is happening with prices and sales? A: As far as prices are concerned, I think that has been pretty lacklustre in December. We have seen Rs 10-30 drop across regions. We did a dealer check. We got the feel that there has been drops in pricing. Demand level has remained pretty muted because of the late festive season and labour issues. Some of the pockets per se, Uttar Pradesh (UP) market has some brick manufacturing ban, which has resulted in halting of construction activity. So, it is pretty region specific, but more or less the prices are declining. The hope is that from the first week of January, there will be some announcements, the prices will start to increase with the busy construction season setting in. Gujarat is the only exception. I think Gujarat has seen a price rise of about Rs 15 a bag in the last week. Probably they will see another Rs 10-15 a bag in the coming weeks because post election some spending will start from the government. Q: The stocks have been fairly stable. Which is your top pick from that sector? A: Our top picks have been Ambuja Cement, and Ultratech Cement in the largecap space. In the midcaps, we continue to push JK Lakshmi Cement and Shree Cement. We believe they are in a sweet spot because of very good region from a two-three year perspective. The results may be a little bit muted. Q3, on a sequential basis, you may see drop in terms of margins, given the fact that realisations are down and volumes are not there. So, probably that would be an opportunity to accumulate some of these names from a longer-term perspective. Q: How did you read the news on JP Associates, a couple of weeks back, the fact that they could be looking to sell one of the units? A: It was on cards. We have been hearing also that probably Ultratech is into the foray, and if that deal happens at USD 160-170 per tonne, it is a pretty good deal from Ultratech’s angle as well. In western market, you become a market leader. Gujarat probably is the best market now for the next three-four years. So, I think it would be a good deal if it happens at around USD 160-170 per tonne.