Commodity Market Veteran Rakesh Arora Sees A Big Trigger For Cement Stocks

Commodity expert Rakesh Arora sees one big trigger for cement stocks: a long-overdue price hike.

To explain, Arora goes back to the past triggers that caused a spike in the price of cement.

"In 2004–05, the government banned overloading of trucks. So, costs for the company went up," Arora, managing partner at Go India Advisors, told BQ Prime's Niraj Shah. "If you could double load the truck, the cost of freight could be significantly lower." 

"Due to this, Rs 140 per bag of cement went up to Rs 235. The difference came to Rs 2,000 per tonne, which is very significant," he said. "Capacity utilisation at the time was good, so that was a tailwind."

The second trigger, Arora said, was when the then Finance Minister P Chidambaram's formula to tax rising cement prices during the global financial crisis.

"He set up a formula that if prices jumped beyond a certain level, the excise duty would rise significantly," Arora said. "With the tweak in the excise duty, industry became comfortable with Rs 20–30 hikes per bag. Prices went to Rs 350-360 per bag, where they have been stable for the last 7-8 years."

But with coal costs rising 4-5 times, Arora does not expect cement prices to remain stable.

"The price per bag has taken a jump to over Rs 400," he said. "The current government has browbeaten the industry to not take the prices too high, but as we enter the festive season, we're seeing prices already starting to move higher."

Arora said, prior to 2004, cement prices were Rs 400 per tonne. After the financial crisis, they jumped to Rs 800-900 per tonne. Post excise duty, it was Rs 1,000–1,100 a tonne, he said.

"Now, they'll move to Rs 1,400-1,500 [a tonne]," Arora said, "because cement prices remain stuck, they don't change every few years."

That prompted India Advisors to prefer cement even before the Ambuja-ACC acquisition was announced, he said. "Which [the deal] adds spice to the whole thing."

The way demand is increasing for cement, adding capacity is going to be a challenge, Arora said.

The Adani Group aims to double ACC-Ambuja Cement's capacity from 70 million tonnes to 140 million tonnes in the next five years.

"India's capacity is around 500 MT and demand is 400 MT," Arora said. "In the next five years, if demand grows at 8% CAGR, one needs an additional 40 MT per year. In the next five, the need is 200 MT," he said.

Ambuja and ACC hold 16% market share, Arora said. "Which means, they have to own 32 MT of this 200 MT," he said. "So purely on organic demand, their capacity expands to 100 MT from 70 MT."

"Suppose they add another 10-20 MT extra, they gain only 1-2% market share in 5 years," he said, adding, whereas, ACC-Ambuja has lost 8% market share in the last 15 years.

"Probably under Adani, they'll go to 18% or maybe 20% if they're aggressive," Arora said. "So we're not talking about too much of a market share gain despite big numbers."

Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.