Foreign portfolio investors’ (FPIs) ownership in cement companies declined in the quarter ending June 2015 as low volume growth and slump in cement prices was seen affecting companies’ profitability.
According to Capitaline data, six out of 11 companies have reported a sequential drop in foreign ownership for the quarter ending June 2015. The declining trend in FPI ownership has been similar for the last four quarters where large-cap companies have seen a consistent decline in foreign shareholding.
FPIs have consistently cut their ownership in companies like ACC, Ambuja Cements, UltraTech Cement and India Cement, with the latter seeing the steepest fall in FPI shareholding.
India Cements reported a 4.15 percentage points (ppt) drop in FPI shareholding for the quarter ending June 2015 to 27.65%. For the last four quarters, FPI shareholding has dropped 6.8 ppt. The Chennai-based company’s tendency to be frequently embroiled in controversies is one of the main reasons behind the FPI outflow from the company, experts said.
ACC has seen a 1.23 ppt drop in June shareholding in June quarter to 14.36%, while ownership has declined 4.29% in the last four quarters, whereas India’s largest cement company by volume, UltraTech Cement has seen FPI ownership fall 1.37 ppt in last four quarters, with a 0.8 ppt-drop reported in the previous quarter.
At a macro-level, the pimary reason is the weakness in demand and price arising out of weak monsoon forecasts which has a negative impact on rural demand coupled with less-than-expected infrastructure spending by the government.
Increase in public spending on infrastructure projects was one of the key poll promises made by Narendra Modi-led Bharatiya Janata Party (BJP) during the national elections of 2014. While low cost housing and smart cities have been on government agenda for long, the government is yet to step up its spending on infrastructure, experts added.
US investment banking firm, Morgan Stanley reduced FY16 earnings estimates by 10-12% due to recent weakness in demand and prices. “Cement demand has been muted in first half of CY15, resulting in price weakness… We estimate ~1% production growth in the period, partly driven by sharp cut in government expenditure in March and slowdown in demand in North and West, in particular,” Morgan Stanley analyst Ashish G Jain said in a research note.
While large-cap companies have reported a decline in FPI ownership, the small- to mid-sized companies have witnessed marginal increase from the previous quarter as well as for the last four quarters, data showed.
Hyderabad-based Prism Cement reported a 1.39 ppt increase in FPI shareholding to 8.86%. For the last four quarters, FPIs have increase their stake by 5.1 ppt. The case is similar for JK Cements, JK Lakshmi Cements, and Shree Cement, Capitaline data showed Kotak Institutional Equities said that mid-sized companies traded relatively cheaper valuations than large pan-India players. “Mid-sized cement companies are on the cusp of joining the ‘big boys club’ with an expanded capacity base, strong earnings trajectory and a more diversified presence,” said Murtuza Arsiwalla, senior analyst, KIE, adding that large companies trade around 10-13 times their FY17e EV/ebitda whereas the mid-sized companies trade around 5-7 times.