Cement: Strong demand, but accelerated capacity addition can weaken prices

Indian cement companies have been reporting strong volume sales for the past few months. The additional capacity that has come on stream has enabled most of the cement manufacturers to increase the total cement production. Various measures introduced in the budget to stimulate rural growth in infrastructure and an increased allocation in various infrastructure projects is expected to sustain the demand. Cement prices rose across India in Feb 2010 post Union Budget, due to higher excise duty, increase in freight costs and on the back of a shortage in the availability of rail wagons. We expect prices to remain firm on account of the demand arising from the Commonwealth Games, infrastructure spending and recovery in urban housing segment . However, the rise in prices is expected to be a short-term trend, as the new capacity addition over the last few months is expected to exert pressure, going ahead. We believe that north-based players will do well as compared to south-based players, on account of relatively balanced demand-supply dynamics.

By, Mr. Rupesh Sankhe,Sr. Analyst-Power & Cement, Angel Broking

Hotels - Time to check in

The Hotel industry in India was on a dream run during CY2004-08, with demand for rooms outstripping supply. Factors like high economic growth, rising income levels, government’s ‘Incredible India’ campaign, low cost airlines, etc., all contributed in increased movement of both domestic and foreign tourists within the country. Aiming to grab a share of the growing hospitality industry, many players, both domestic and international, announced aggressive plans to set up hotel properties across key destinations in India. This led to fears of over-supply in rooms, which would have put pressure on Occupancy Rates (ORs) and Average Room Rates (ARRs) of the hotel players thereby adversely hampering their profitability. However, sentiments reversed by the end of CY2008 due to dire global economic conditions, leading to lower tourist activity both for leisure and business purposes. Moreover, tighter liquidity conditions led to many players cancelling/delaying their earlier announced roll-out plans. However, with India emerging as a frontrunner in recovering from the global turmoil, signs of improving demand are visible again, with tourist movement picking up thereby resulting in ORs improving, which would consequently be followed by ARRs in the coming quarters. This coupled with lower supply of rooms than earlier estimated would enable hotel players to regain lost ground.


By Mr. Viraj Nadkarni, Research Analyst, Angel Broking

Union Budget 2010-11 – No brake in momentum

Finance Minister, Mr. Pranab Mukherjee, managed to do the unexpected in the Budget. In what was largely being feared as an exercise that could have put some friction to the recovery that the Indian economy is currently witnessing, it actually turned out that the Finance Minister has managed to effectively conclude this exercise in a highly balanced fashion. This has left a lingering 'feel-good factor' in the minds of most segments of the society; be it corporates, individuals, economists, etc.

The markets have already given thumbs up to the Budget. What has aided market sentiments is the fact that the expectations had been quite low in the weeks prior to the Budget. Also, the apprehensions with respect to the extent of the stimulus withdrawal possible in the Budget had kept market participants shying away from investing. However, not only was the stimulus much gradual than anticipated, the FM has managed to please a large section of the economy without compromising on fiscal responsibilities, which was accepted well by the market. Thus, at the current juncture, one can safely conclude that there seems to be no brake on the momentum being witnessed in the economy as the FM has been calculative enough to initiate a move towards fiscal prudence without jeopardizing the country's growth prospects.

By, Hitesh Agrawal, Head – Research, Angel Broking

Railway Budget 2010-11 Review: Visionary moves

Ms. Mamta Banerjee's second Railway Budget has turned out to be a non-event from the stockmarket point of view even though certain key points are worth highlighting, which makes this Railway Budget somewhat different from the earlier ones:

• The release of the 'Vision 2020' document aimed at widening and strengthening the country's rail infrastructure network and regaining the position of the world's second largest network.

• Ambitious target of completing 1,000 route-kms of new lines in 1 year as compared to the last 5-year average of 219 route-kms and 180 route-kms in the last 58 years.

• Special emphasis on building Public-Private-Partnership (PPP) and proposal to set up a special task force to clear investment proposals within 100 days, thus taking care of the administrative and procedural delays.

In conclusion, the fact that the Railway Budget spared any hike in passenger fares and freight rates will undoubtedly please both - the common man as well as corporate India. Further, with the Minister showing continued inclination towards an increase in private participation in the years to come, opens up immense opportunities for the private sector to contribute to the growth story of Indian Railways. Overall, the Railway Budget can be stamped as a positive one with a visionary agenda set for Indian Railways to follow over the next decade.

By Hitesh Agrawal, Head – Research, Angel Broking

Union Budget 2010-11: Time for calculated moves

The Finance Ministry and Industry Associations have been buzzing with activity over the past few days. While the former has been busy formulating this year’s Budget, the latter have been engaged in preparing their wish list for the Budget apart from trying to justify the reasons for the continuation of the stimulus provided by the government to them last year.

However, the Finance Minister is once again at the crossroad. He has to choose between: 1) continuation of the stimulus measures provided to various sectors over the last one year (to weather the global crisis) and support growth or; 2) withdraw some of the stimulus keeping in view the high fiscal deficit situation in the country, especially considering the fact that the stimulus measures have done their bit in pulling the economy back up.

Notably, partial Stimulus rollback and fiscal prudence setting in are already reflecting in the current behaviour of the market participants. Thus, any significant deviation from the expected can lead to heightened volatility in markets. However, considering the limited options at hand for the FM in this Budget, it seems unlikely that he can deviate from the path visible. Thus, the FM’s moves are expected to be calculative so as to ensure that a move towards fiscal prudence is initiated without jeopardizing the country’s growth prospects.

By Mr. Hitesh Agrawal,Head – Research,Angel Broking

Oil & Gas – Future to be fuelled by Gas

BSE Oil & Gas index has underperformed the benchmark indices over the last 6-8 months driven by subdued performance by PSU oil companies and RIL. However, amidst the same, Gas Transmission and Distribution (T&D) companies have delivered strong performance with gains being witnessed in GSPL, Gail, Gujarat Gas and Indraprastha Gas. Going ahead, with the doubling of the gas supplies, good times for gas T&D companies, viz. GAIL, GSPL and Gujarat Gas are likely continue. India is likely to see strong demand for natural gas driven by key sectors such as power, fertilizers, petrochemicals/refineries and city gas distribution. In order to leverage on the increasing gas demand-supply equation, GAIL and GSPL have significant network expansion plans on the anvil. Thus, network expansion, stable regulated returns and strong earnings visibility are likely to drive the performance of the transmission companies. Similarly, improving gas supplies will help the gas distribution companies on account of volume growth. Moreover, given the uncertainty and ad-hocism associated with investment in oil stocks, gas companies are set to outperform going ahead.

By Mr. Deepak Pareek, Sr. Research Analyst,Oil & Gas, Angel Broking

Capital Goods – Good for long-term capital creation

After being the darling of stock markets for several years (during the boom time of 2003-2007), the fortunes of the Capital Goods sector took a complete U-turn post the Lehman fiasco which engulfed the entire world into a deep financial crisis. However, after reeling under pressure for couple of years, the sector is once again on a march upwards. The scenario for the Indian economy in general and that for the Capital Goods industry in particular has undoubtedly improved to an extent, after the political stability in the country along with the easing liquidity situation and the offshoots of recovery in the global economy. The visibility also seems to be gradually improving, with foreign investments in India continuing their momentum, with financial closure now happening of projects stalled for several quarters, and with quite a few companies across sectors having successfully tapped the domestic and global financial markets. Nonetheless, we believe that several Capital Goods stocks are already trading at premium valuations, leaving little scope for outperformance. Thus one needs to be selective in stock picks keeping in mind valuation comfort coupled with sustainable competitive advantage for the businesses.

By Mr. Puneet Bambha,Research Analyst,Capital Goods & Engineering, Angel Broking