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    Why Rakesh Arora is in no hurry to buy cement and steel stocks now

    Synopsis

    Rakesh Arora of Go India, predicts a moderate outlook for the cement and steel sectors beyond Q1 of this year. A lack of price discipline and the emergence of new competitors such as Adani Cement could hamper pricing, leading to a potential disappointment in the cement industry if companies continue to push towards volume over pricing. While cost pressures are reducing and margins are improving due to cost reduction, the picture for steel remains uncertain due to global demand risks and dropping steel prices in China.

    Rakesh Arora-GoIndia-1200ETMarkets.com
    Rakesh Arora, Managing Partner, Go India Stocks.com, says in the cement sector, the improvement in margin because of cost reduction will play out in Q1. Beyond that, it will be all price discipline. If the industry does not come together, there could be a little bit of disappointment in FY24 at least.

    Coming to the steel sector, Arora said: “There will be a little bit of pick-up in margins in Q1 but that will be the peak for FY24. Things are going to moderate from there on. The results are good, valuations are okay, but there is no real hurry to buy.”


    In light of the fact that it has been pretty robust for the cement sector on the whole. There has been recovery in profitability for a lot of these companies. We have also seen a large capex pipeline and demand has been fairly strong. What is your outlook on the demand scenario? Could we see a pre-election spend which could give a boost going down the line?
    Obviously, the demand outlook is extremely bright as we have seen during previous pre-election runups that governments tend to fast track all the projects and that really pushes cement demand up. But this time there is another factor at play and that is a new entrant; Adani Cement bought Ambuja and ACC and they have been going through a little bit of turmoil in the last three to four months. Competition which is Ultratech, Shree etc. have been pushing more volume into the market trying to capture market share. That is why there is a little bit of disappointment that cement prices have not really moved up the way people expected, given the demand outlook. I think this scenario will continue.

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    We would see better volume numbers because now probably Ambuja and ACC have also found their bearing and they would also push volume. The company yesterday guided for 15% growth for FY24 and that is a big number. Industry demand would be around 8-9% and they are trying to push more volume. So volume wise, there is no challenge. Everybody is trying to push more volume and there is demand also. It is the pricing where the challenge is.

    Yes, pricing remains a bit of a challenge. But do you think that the Street was baking in a lot when it comes to the margin improvement and that does not seem to factor in the Q4 numbers? Do you see a big upside in Q1 of this year?
    Yes, margin improvement has come in because of cost reduction. Energy prices have fallen quite sharply. There would be some follow through margin expansion in Q1. However, it all depends on how the industry behaves for FY24 as a whole, because if everybody is trying to push volume, pricing can take a backseat.

    So the improvement in margin because of cost reduction will play out in Q1. Beyond that, it will be all price discipline. If the industry does not come together, there could be a little bit of disappointment in FY24 at least.

    But last year or last to last year was marked by a lot of consolidation in the sector. Is that largely over now?
    Last year meaning there was huge cost pressure and cement prices did go up. This time we are seeing a reversal. Cost pressures are going away. If cement prices can sustain at this level, we should be okay. But if they come under pressure, because normally price increases pre-monsoon and then during monsoon, prices tend to go down. But this time around, the price increases have not really happened. So it is a little bit of a tentative situation given the way industry players are behaving but the overall scenario is still okay.

    My question was consolidation with respect to the M&As that we had seen over the last couple of years. There was a lot of consolidation on that front. Do you think the M&A activity will stabilise now given that they are all taking a lot of Brownfield expansion and the capacity is expected to come up as well?
    There are not too many companies which are up for sale and not too many sizable companies left actually. So there are little bits here and there. So we are hearing in the media reports about Sanghi Cement being on the block and that is probably on the cards in the near future. But beyond that, I am not really seeing too much activity and there is not too much scope now, given that the big chunk capacity has already been taken out.

    Let us shift focus to the entire metal space. Your read through of the earnings that we have got from Tata Steel?
    Tata Steel’s India business did really well and surprised positively as compared to what people were estimating. In Q1, there will be some follow through because cost reduction is happening there also. Coking coal prices have fallen from $3.63-$3.70 to $2.30 and that is a big improvement but the wildcard here is China.

    China's demand has not really come up, despite the reopening and all that expectation. And at the same time we are staring at a recession in the developed world, largely the US etc. So the demand outlook globally is not looking that robust. While cost pressures have come off, steel prices are also coming off in a big hurry. China steel prices have actually dropped by almost 20-25% in the last two-three months. That effect is now starting to come into India. Indian steel prices are also moderating.

    I think there will be a little bit of pick-up in margins in Q1 but that will be the peak for FY24. Things are going to moderate from there on. The results are good, valuations are okay, but there is no real hurry to buy.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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