Cement Sector Top Picks: India’s cement sector has witnessed headwinds over the past few quarters, from rising interest rates to elevated cost pressures, the building material sector including ceramics, paints and adhesives, pipes, wood panels, cementand steel. It has also seen two major events in recent months. One, Adani Group has announced its acquisition of Holcim India companies (Ambuja and ACC) at valuations close to USD175 per ton. Two, Ultratech has announced that it will spend Rs 128 billion to increase capacity by 22.6 million tons (at a capital cost of USD75 per ton). As a result, cement stocks cracked over 30 per cent from highs and found themselves on the worst-performing stocks list for the past week.
However, analysts at ICICI Securities suggest a marked improvement in demand in June, 2022 to date led by pre-monsoon push, pick-up in infrastructure projects, reduction in prices of steel, cement, etc., and better labour availability.
In a note, the brokerage house said: “The month could see growth in mid-teens, both MoM and YoY, implying 6 per cent volume CAGR on a 3-year basis. With pan-India utilisation at nearly 78 per cent, the industry may see its second-highest volumes in Jun’22 after peaking in Mar’22, in the past seven months. Rs 35-40/bag out of Rs 50-55/bag price increase announced in mid-Apr’22 seems to have been withdrawn in the North, Central, and East regions, whereas only Rs10-15/bag, has been rolled back in the West in YTDQ1FY23. Prices in the South continue to be broadly flat QoQ in Q1FY23-TD with dealers expecting price hike announcements soon. We believe companies would be able to pass on cost escalations QoQ even in Q1FY23E and that average EBITDA/te is unlikely to fall QoQ (though it may continue to shrink YoY).”
Speaking about the near-term triggers in the cement sector, the note stated that “(a) Asset-based valuations are attractive at around the long-term average-1SD after >40 per cent stock price correction over past seven months; (b) any sharp reduction in fuel costs ; (c) price increase in South: with South entering a seasonally weak period of monsoon which stretches till Dec’22, the region would be left with no choice but to raise prices any time soon, in our view; (d) price increase in monsoon: given that Jun’22E exit prices are 2 per cent lower than the Q1FY23E average and demand being relatively strong, companies may raise prices in monsoon to mitigate QoQ cost increases in Q2FY23E.”
Top Cement Sector Picks
ICICI Securities said in Its note that Ultratech Cement (UTCEM) and Shree Cement (SRCM) remain their top picks.
Ultratech Cement (UTCEM)
The current market price of UltraTech cement is Rs 5,433 apiece (around 12:03 pm) with a gain of 0.08 per cent. The stock has touched its 52-week high and 52-week low at Rs 8269 apiece and Rs 5410 apiece, respectively.
The company posted a jump of 47.6 per cent YoY in its consolidated net profit at Rs 2,620 crore for the quarter ending March 31, 2022. It also has great dividend track report and consistently announced dividends for the last 5 years.
ICICI Securities has given the stock a ‘BUY’ rating at a target price of Rs 8,500.
Shree Cement (SRCM)
The current market price or CMP of the stock as of writing the report is Rs 19,233.30 apiece. The stock’s 52-week high and 52-week low levels are Rs 31,469 apiece and Rs 19,080 apiece, respectively. The company has a good dividend track record and consistently paid out dividends for the past 5 years without fail.
The company has a strong outlook as it is effectively using shareholders’ money and its ROE is getting better. It announced a dip of 16 per cent in its standalone net profit at Rs 645 crore for Q4 ending March 31. There is a surge in revenue at 15 per cent higher from Rs 3552 crore in the previous quarter.
ICICI Securities has given the stock a ‘BUY’ rating at a target price of Rs
27,000.
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