Chennai, July 1: Although all major cement scrips have recorded handsome gains over the past one month, only south-based cement companies like Madras Cements and India Cements seem to justify the rise if one goes by their performance during 1996-97 and future prospects. The two companies have proved that they can keep their margins in tact despite unfavourable conditions. Moreover, the coming year is expected to be better for the southern units compared with others because of an insulated market and undisturbed demand-supply mismatch.

Last month, cement scrips fared well on the bourses. India Cements, for instance, gained 24 per cent. The scrip, which was hovering around Rs 74 in the beginning of June, flared after the results were announced. The company surprised the market with good results and the interest in the scrip is continuing unabated except for a slight correction. Reportedly, foreign institutional investors (FIIs) are picking up the scrip.

Madras Cements also gained nearly 10 per cent after its results were announced. According to an analyst, the company is the cheapest producer of cement and can outperform other cement producers. Moreover, the company's new plant in Thiruvalluvar district, which commenced production in May, will feed the Tamil Nadu market, a premium market segment. A US-based emerging market fund is learnt to be picking up the scrip. The scrip closed at Rs 7,900 on June 30 as against Rs 6,400 in the beginning of June.

Chettinad Cements, however, did not show much appreciation and analysts attribute this to the poor perception of the management among institutional investors. Besides, the company's cement capacity is not large enough to absorb the poor performance of its shipping division. Gujarat Ambuja Cements also flared up in June-end on rumours of a bonus issue. On June 30, it hit the circuit breaker on the National Stock Exchange (NSE) at Rs 342.70. The company, like its counterparts in the south, caters to the premium market segment in Gujarat and Mumbai. While the company's new one million tonne capacity plant in Gujarat recently commenced production, surplus cement production in the state may squeeze its margins. Moreover, the company's plan to ship the surplus cement produced in the Gujarat plant to South through a bulk terminal at Kochi is yet to fructify. The company is expected to post improved results.

ACC made the maximum gains in June with the scrip rising by Rs 35. The `better than expected' results brought some buying interest in the scrip. The gains are attributed more to technical reasons than any fundamental performance.

According to analysts, the gains are justified only in the case of India Cements and Madras Cements. The volume growth in the industry is going to be minimal (nine per cent according to CMIE) and those companies, which would be in a position to pass on the cost to consumers and thereby protect margins would fare well. Southern cement units have the best chance because the demand-supply mismatch is unlikely to be disturbed in 1997-98. The increase in capacity is expected to be about five per cent as against the historical increase in demand of eight per cent. Moreover, the added advantage is their proximity to the user market. This, to a major extent, reduces the impact of the `likely petro-product price hike'.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.