Cement Stocks Outlook: Negative bias to continue next week

Most cement shares are seen extending negative bias next week in
the absence of any positive trigger.
May sales and output data was disappointing, and the weak trend is
likely to continue in June as well. This is likely to dampen chances
of buying support for these shares.
In the week gone by, front line cement shares closed 2-10% down
following weak sales performance in May.
We attributed this to ban on export that impacted supply
scenario in western region to which most of these companies have large
exposure.
AV Birla group cement companies--Grasim Industries Ltd and
UltraTech Cement Ltd--cumulatively reported 0.8% year-on-year rise in
sales for May at 2.66 mln tn. Output for the month rose 2.5% to 2.70
mln tn.
Ambuja Cements reported 1% fall in sales to 1.51 mln tn, while
posting 1% decline in production to 1.49 mln tn.
ACC also reported over 1% decline in both sales and output at 1.80
mln tn and 1.79 mln tn, respectively.
In June, onset of monsoon and pause in construction activity in
regions except south are likely to dent demand for the commodity and
thereby impact cement companies' sales growth that is likely to be
flat-to-negative.
Some institutional investors may consider buying these shares
based on valuation argument.
Most front line cement shares are now trading around 10 times of
one-year forward earnings estimates and around 6 times enterprise
value to earnings before interest, tax, depreciation and amortisation.
However, this may not prompt investors to buy these shares as
outlook on pricing and supply scenario has turned bleak.
In 12-18 months, cement prices are seen falling around 10% due to
capacity expansions.
.
STOCK VIEW
We also expect cement shares to continue showing sluggish trend
next week. However, a major downside is unlikely.
Shares of ACC are seen finding support at 600 rupees with a major
resistance likely at 655 rupees.
Grasim Industries is expected to move higher up to 2,340 rupees
and is seen finding support at 2,152 rupees. The share is likely to
outperform other cement shares as indicating some positive moves next
week.
Ambuja Cements is likely to continue its consolidation between 84
and 92 rupees.
Shares of India Cements are expected to witness some positive
movement up to 183 rupees next week. However, it is likely to face
selling pressure hereon and may find support at 177 rupees.
Among other cement shares, they recommended buying shares of
Jaiprakash Associates for an upside of 15-18 rupees with a stop-loss
at 190 rupees.
Yesterday, shares of Jaiprakash Associates closed at 201.20
rupees, down 2.2% from Thursday.
.
This week's closing prices, in rupees, of key cement shares, on
National Stock Exchange, compared with previous week:
.
Company Closing price Closing price % Change
Jun 6 May 30
.
ACC 628.45 661.30 (-) 4.9%
Grasim Industries 2,262.25 2,221.80 1.8%
Ambuja Cements 85.40 95.10 (-)10.2%
India Cements 165.00 160.10 3.1%
Ultratech Cement 640.50 649.55 (-) 1.4%
.
Sensex 15572.18 16415.57 (-) 5.1%
Nifty 4627.80 4870.10 (-) 4.9%

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