Though the downturn in the cement sector is expected to continue for one or two years,select stocks offer investment opportunities. According to Pawan Burde,analyst at Angel Broking,Focus on the frontrunners such as Grasim Industries,Ultratech Cement and ACC that offer strong fundamentals and cheap valuations,and have a long-term horizon of three years or more.
ACC. The stock is currently trading at a price to earnings ratio (P/E) of 8.7. It registered a 3-year CAGR of 21.4 per cent in income and 56.1 per cent in net profit. The return on capital employed (ROCE),a measure of a companys profitability,stood at 28.7 per cent in FY08 (an increase of 17.2 percentage points since FY05). The company has been able to reduce its debt every year (see table). The earnings per share (EPS) registered a three-year CAGR of 49.7 per cent. Net profit margin (NPM) and operating profit margin (OPM) inched up marginally by around 60 basis points (bps) and 90 bps respectively in December quarter (compared to June FY09).
Grasim Industries. Currently trading at a P/E of 6.8,the stock has shown a 3-year CAGR in EPS of 32.3 per cent. The company failed to maintain its margins: NPM and OPM dipped by almost 300 basis points between the second and third quarter of FY09. However,income and net profit resgistered a three-year CAGR of 17.8 per cent and 36.1 per cent respectively. ROCE increased almost 280 bps in FY08 compared to last year (see table).
Ultratech Cement. The company registered a robust three-year CAGR of 607.1 per cent in net profit. The stock currently trades at the lowest P/E (among the three stocks) of 5.8. The three-year CAGR in EPS of 117.4 per cent makes the stock attractive. The companys ROCE has increased nearly 26.3 percentage points in three years. However,net profit margin and the operating profit margin declined to 14.4 per cent and 27.3 per cent respectively in 3QFY09 compared to earlier two quarters (see table).
Invest in these sectors only if you have a long investment horizon as the ills plaguing this sector excessive capacity and poor growth in the housing sector will take some time to change.