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Analysts expect stocks of major cement companies to remain in the negative during the week ahead as demand has not recovered, affecting pricing power of companies. The market will also keep an eye on Reserve Bank of India's monetary policy review to be announced on Wednesday. RBI Governor Raghuram Rajan has said the central bank is very uncomfortable with the current levels of inflation and weak economic growth too is a concern. Data released Thursday showed India's annual inflation rate based on the Consumer Price Index (Combined) rose to an all-time high of 11.24% in November driven by a sharp rise in vegetable prices. Separately, India's industrial output contracted 1.8% in October, slipping to a four-month low as consumption demand continued to slump. Industrial production had grown by 8.4% a year ago and by 2.0% in September.The picture is quite grim. The demand scenario has not improved as much as we would have liked it to, barring in a few states. Companies that are keen to hike prices have not been able to do so due to poor demand. Broadly, cement stocks have outperformed the broader markets by around 10% over the past three months; hence, near-term performance could remain range-bound and closely track cement price movement. After an impressive compounded annual growth rate of 8.6% in cement consumption during 2004-2012, the moderation in demand is moving towards a new normal growth rate of around 6% in 2013-2016. In our view, slower consumption growth, sustenance of a large surplus (55-60mtpa, which is around 23% of demand) and low consolidation (top-2 groups controlling just 30% of capacity) would restrict any meaningful recovery in pricing power for cement manufacturers in the medium term.
Analysts expect stocks of major cement companies to remain in the negative during the week ahead as demand has not recovered, affecting pricing power of companies. The market will also keep an eye on Reserve Bank of India's monetary policy review to be announced on Wednesday. RBI Governor Raghuram Rajan has said the central bank is very uncomfortable with the current levels of inflation and weak economic growth too is a concern. Data released Thursday showed India's annual inflation rate based on the Consumer Price Index (Combined) rose to an all-time high of 11.24% in November driven by a sharp rise in vegetable prices. Separately, India's industrial output contracted 1.8% in October, slipping to a four-month low as consumption demand continued to slump. Industrial production had grown by 8.4% a year ago and by 2.0% in September.The picture is quite grim. The demand scenario has not improved as much as we would have liked it to, barring in a few states. Companies that are keen to hike prices have not been able to do so due to poor demand. Broadly, cement stocks have outperformed the broader markets by around 10% over the past three months; hence, near-term performance could remain range-bound and closely track cement price movement. After an impressive compounded annual growth rate of 8.6% in cement consumption during 2004-2012, the moderation in demand is moving towards a new normal growth rate of around 6% in 2013-2016. In our view, slower consumption growth, sustenance of a large surplus (55-60mtpa, which is around 23% of demand) and low consolidation (top-2 groups controlling just 30% of capacity) would restrict any meaningful recovery in pricing power for cement manufacturers in the medium term.
