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

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

A hike won’t stop the coming boom

RBI is expected to come out with its monetary policy by the end of January. The market is expecting a rate hike or CRR hike by the RBI. The market has already discounted these expectations, as the banking shares have been underperforming the market in last 4 weeks. But the concerns of monetary tightening by the market have been overdone in our opinion. Banks are still sitting on huge liquidity and FIIs are pouring in money in the market on every fall. Interest rates are almost 2-3% lower than peak rates, even lower in case of some products. It will take several rate hikes by the RBI over a period of a couple of years, before interest rates become high enough to actually hamper demand in the economy. The fact is that as foreign money continues to come into the economy, the business confidence and consumer confidence starts picking up, economic activity tends to get a boost and companies and individuals alike look to borrow money from domestic banks even at increasing rates due to the positive economic environment. In our view, we are just at the beginning of a sharp increase in loan growth and overall economic activity, which we believe will take the markets and with that banking stocks, to much higher levels in the coming quarters.

By Vaibhav Agrawal, VP Research-Banking, Angel Broking