Bullish on cement sector; bet on Grasim: Nirmal Bang

A: The cement stocks like yesterday there was an upmove because if you look at the core sector data, there has ....cement has grown close to 16 percent year-on-year (Y-o-Y) for the month of July and if I look at the last quarter data, the cement volume has grown close to 9 percent for Q1 of FY15 as compared to Q1 of FY14. So clearly, we can see that some amount of activity is happening in the cement where volume growth has picked up in the cement space, which is enough for the players to have the pricing advantage at some point of time.

Last year FY14 was a bad year when they didn’t have the volume. Volume was close to 1 percent consumption growth and that why they could not have managed the prices but this is the scenario where volume growth is close to 8-9 percent and people are able to hold in the prices that we have seen in southern market also and we have seen some kind of a price improvement coming up from October onwards also. So that should benefit the companies going forward and we are very positive on the demand scenario also going forward, we expect 8-9 percent kind of a demand sustaining for the industry this year and this can continue for at least FY16-FY17 as well which should benefit all the cement producers. So we are very positive on the entire sector per se at this point of time.

Anuj: What has been interesting is that we have Ultratech Cement which has quite clearly been the best of the pack followed closely by ACC but Ambuja Cement has lagged far behind, so in terms of your pecking order, how would you approach these three big names before you talk about the midcaps?

A: We are putting Grasim above Ultratech Cement and ACC at this point in time because of the valuation discount which is trading compared to Ultratech and normally we have seen in a bull cycle, that our holding company discount narrows in the bull cycle to close to as well as 30 percent also. We are seeing 30 percent holding company discount to Ultratech that is why we are getting close to 30 percent upside and it is followed by ACC and Ultratech. So Ambuja Cement remains our least preferred pick at this point of time because of the valuation and because they will be having a group restructuring also. So because of these two issues, Ambuja is least preferred among the top four. 

Ekta: In metal space, I want to ask you about JSPL and Hindalco because there was incremental news that a couple of their blocks which are expected to be operational and important for future capex might not be included in those six mines which could be operational going forward. How have you read the news?

A: Utkal B-1 of JSPL and Mahan of Hindalco is not there in the list. Possibly our sense is that the door is not closed as of now. So by September 9 when Supreme Court (SC) will make the hearing, we might see these mines can be included again. That is the first impression.

Secondly, even if that scenario pans out, it is not that the door is closed because then it will go for auctioning and these companies might be able to get the same coal blocks, which they have worked about.

I would like to highlight one thing here that if the companies get the coal block, they will have to pay Rs 295 per tonne additional royalty on the captive coal blocks, which will not be there for the coal blocks which they got under the auctioned process. So the capital allocation might -- if they talk about -- not be so bad news if they go under the auctioning and if they get it at a reasonable price.

Ekta: Have you reworked your portfolio or your top picks or maybe you P&L estimates or are you still waiting for the final verdict?

A: We are waiting for the final verdict and in terms of our top picks, Tata Steel, JSW Steel and Sesa Sterlite continue to remain our top picks in the metal pack.