Cement Sector Update - November 2006

The bigger price increase of Rs5 after an increase of Rs3 shows the strong expectation of higher demand in the coming months by the Cement producers.

Cement prices moved up again from 1st of November 2006, as monsoon ended and post festive season construction activities started in West and North. Cement prices moved by Rs5 in November. This was over and above the cement price hike of Rs3 in the first week of October 2006. The bigger price increase of Rs5 after an increase of Rs3 shows the strong expectation of higher demand in the coming months by the Cement producers.

Our top picks in the sector are Kesoram Industries, Shree Cement and Ultratech Cement. Kesoram Industries is expected to commence production of cement from its new 1.65 mn ton capacity from mid of December 2006 and with rubber prices stabilizing its tyre margins are also set to improve. We expect Shree Cement to benefit from strong pricing environment and slew of capacity additions in FY07 and FY08. Our re-rating of the stock from HOLD to BUY stems from increase in capacity utilization of its expanded capacity from 107% in September 2006 to 124% in October 2006. We expect Ultratech Cement to benefit from strong prices and reduction in furnace oil and naphtha prices and maintain our BUY rating. We maintain our HOLD rating on ACC.

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