anish

Originally Posted by anish

 Ambuja Cement has been downgraded to ‘sell’ as the stock looks overvalued at the current price and negative outlook on the cement sector. The stock is currently traded in the range of Rs.145 and the price is expected to drop to Rs.109 over a one year term.

 The outlook on the sector appears lower average demand growth for cement, which has been lowered to 8% yoy as against the earlier estimate of 10% yoy for FY11. This is because of lower than expected performance of the sector year to date (YTD) and slowing momentum in certain hotspots like NCR (National Capital Region), Andhra Pradesh and Karnataka.

 Though there had been several price kike announcements in the southern and western region, it is doubtful whether it would be implemented in full because of increasing concern over slower demand.

 Price hikes seem unsustainable while looking on the supply side also. It seems that capacity is in excess of demand and capacity utilization is expected to be in the range of 83- 85% only in FY11 and FY12. Cement prices are expected to drop down by 5.8% yoy in FY11 and a moderate 3.2% yoy recovery is expected in FY12.

 Ambuja was preferred to other stocks earlier and it was recommended to ‘hold’ due its relatively better margin, 10% yoy volume growth estimates for FY10(year end in December) and relatively low exposure in the south.

 Currently, the stock price appears very high and it has outperformed the Sensex by 25%. So, it would be better to sell off the stock at the current price.

 The downward drift in the stock price to the target level (Rs.109) could be arrested if Holcim is going for consolidating its stake in the company, higher than expected volume growth or better price realization.