What's in store for the cement sector?

Rakesh Arora of Macquarie Securities says that the dispatch numbers of cement companies released recently look quite reasonable.

Excerpts from CNBC-TV18's exclusive interview with Rakesh Arora:

What did you make of the numbers and what is your year end target for cement companies?

In terms of dispatch growth, we are looking at 8.5% for most companies and the industry at average. The dispatch numbers for June are quite reasonable, 7.5% as domestic growth, and exports up by 20%. So overall it is looking quite decent, coupled with price increases that we have seen. Prices are up 24% YoY, so there is nothing to complain about on this front.

How do you see the monsoon outlook for cement companies? Are we going to see a bigger than usual drop?

No, basically if one recalls, last year, we had floods in Gujarat and in many other parts of the country. I was looking through my numbers for the next two-three months; they are particularly on the downside, so low base effect will come into play from next month onwards. We may see a higher percentage growth this time around because of the low base effect.

Do you have any thoughts on ACC's dispatch numbers in specific? They seem a lot lower than its counter parts.

Yes, there has been some concern on ACC dispatch growth numbers. But if one looks at the June dispatches, they have done 1.54 million tonne. That is the only company other than UltraTech Cement, which has reported higher numbers than the May numbers. So they have done pretty well. In fact, the UltraTech numbers are also lower than their May numbers. So ACC has been maintaining a constant dispatch run-rate.

They are up 1.3% over May, whereas all other companies, be it Gujarat Ambuja Cements, Grasim Industries, UltraTech, are down by 5-10%

over May dispatches. So they are holding on to the dispatch levels and are constrained by their own capacity. They cannot go too much beyond what they are doing. They are already at 95-96% capacity utilization, and till their expansion comes through at Lakheri in Rajasthan by the end of this year, I think that they will be growing by 5-6%.

How do you expect prices to fare during the monsoon? You said that dispatches will be better than last year, but would you see prices remaining stable?

We are constrained by capacity. If one looks at the capacity utilization, it is at 96% for the first three months as compared to 92% that we had seen last year. If one looks at the clinker production, it is up only 2%, whereas we are seeing dispatch growth of around 7.5-8%. Clearly companies are constrained by capacity and are not able to supply to meet the demand adequately.

We do not foresee any price decrease happening in this monsoon particularly because there is no volume to push prices down. If prices are to increase, it will be in the southern and eastern regions, where they have been slightly lower than the all India average. So if we see some increase happening it will be in those regions.

What would your top pick be from the midcap cement space?

In midcaps, there are many companies, which are now trading below replacement costs, like Kesoram Industries and Mysore Cements. They are attractive. If one has a one-two year horizon then maybe one can look at these stocks.

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