For next two quarters, cement stocks in for good run: Mihir Jhaveri, Religare Capital Market

In a chat with ET Now, Mihir Jhaveri, VP Institutional Research, Religare Capital Market, says prefers UltraTech among largecaps and JK Cement, Orient among midcaps



ET Now: What to your mind is leading to this prop up that one has seen in stock prices of cement and especially the southern players at that because some of the volumes and realisation pictures that we haves seen from the monthly data has been very impressive?

Mihir Jhaveri: The volume growth has been pretty strong. So far our universe itself, we have seen 15 per cent growth YoY. Smaller names who have just recently added capacities are growing at 25-30 per cent plus. So there has been pick up in this quarter, be it January, February with some taper down in March but overall the quarter has been pretty good for all companies including the largecaps and that is the reason why we have seen such swift move in some of these cement names.

ET Now: It is almost consensus then that the trends are in place for upside in the cement sector. But how long before it actually translates into real stock time activity because the stocks have really come back from a decade old hiatus so to speak and has started moving in the last 10 odd days or so. Do you think this is the beginning of a big up-move for a sustainable bull run phase in the cement sector as a whole?

Mihir Jhaveri: In the short cycle things are looking pretty good. So when I say short cycle, probably for one or two quarters, the base is very favourable and given the fact that the prices were increased at the fag end of this quarter which is February and March, the real impact would be seen in Q1 if it sustains. So probably the impact in terms of numbers for some of the smaller names, particularly the northern central belt companies, would be seen in the coming quarter and in the short cycle, the stocks will continue to outperform. In terms of medium to long term, obviously, it depends on how the monsoons pan out given the fact that the last two years we did not have rural demand apart from the infrastructure which was bad, rural demand had slowed down. So if there is a good monsoon, you probably will have a favourable base in the second half and have some pickup in the rural side or the rural real estate. That would aid again in the volume growth. So from a medium term perspective, we will expect monsoon to be good for cement as well and in the short cycle, probably for a quarter or two, we are in for a good run for cement stocks.

ET Now: And what stocks would be your favourite then?

Mihir Jhaveri: In terms of largecaps, we continue to prefer UltraTech and in midcaps we like JK Cement, Orient. But I believe that most of these companies particularly the northern ones like JK Lakshmi, JK Cement, Heidelberg in the central region probably could see much more benefit coming in the coming quarters.

ET Now: What is your stand on this regional versus national players? Go for size, go for reach, go for depth, that is always the best way to invest in a cycle or cyclical commodity but the disparity between the valuations of ACC and JK Lakshmi Cement or ACC and Dalmia Bharat is very large. What is your view?

Mihir Jhaveri: That has always been the case. So from a largecap to a midcap, it has been the case because whenever you have just concentrated region wise presence and a smaller capacity, you tend to trade at discount compared to a largecap which is a pan-India presence and operating economies of scale. So that has been the case in that sense but given the movements in prices and the way things have moved up, I think the north and the central belt are in favour right now. It could come into western market but obviously the western market, Maharashtra, is going through a tough time with drought and therefore it will all depend on how the monsoon pans out for the western market. The south is still in an over capacity zone and so the price volatility may be there particularly in some of the states like Andhra where we have seen prices decline and price movements quite regularly. So in that sense, some of the largecap names like UltraTech looks good. Ambuja also looks good but midcap names in the northern and central belt would look far better given the kind of upgrades that could probably come in on those names.