Demand recovery hope, price hikes brighten outlook of cement players

Industry volumes are estimated to have grown 3 per cent year-on-year, or YoY (33 per cent sequentially) in the September 2020 quarter (Q2)
Cement players are back in the spotlight with the monsoon season’s end. While price hikes have already started in various regions, analysts see demand triggers falling in place, too. The uptick in infrastructure and housing activities, good rural demand, and the recent policy measures by the Reserve Bank of India (RBI) to support the real estate sector bode well for cement companies. 

Analysts say demand has already been ahead of expectations. “The demand recovery has surprised positively and we expect government-led infrastructure projects to further drive the demand momentum,” say analysts at Emkay Global. Looking at better-than-expected demand recovery, Binod Modi of Reliance Securities says he will not be surprised to see demand growth of 1-2 per cent in FY21, against the expectation of a decline.

Industry volumes are estimated to have grown 3 per cent year-on-year, or YoY (33 per cent sequentially) in the September 2020 quarter (Q2), according to channel checks by brokerages with higher growth in the north and the east. South India and Maharashtra, however, were the weak links. Prices fell sequentially (by about 3–5 per cent across regions in Q2, which is seasonally weak because of monsoons), but have remained 3 per cent higher YoY on a pan-Indian basis at Rs 358 per 50 kg bag, indicates the Motilal Oswal Securities (MOSL) data. The brokerage's top picks include UltraTech and JK Cement.

UltraTech remains the top pick of most analysts, given it has expanded capacities to drive benefits from any demand recovery. Its latest and large acquisition, Nathdwara (Binani Cement assets), has seen an integration of 6.25 million tonne (mt) per annum and generated average Ebitda above Rs 1,250 per tonne for the June quarter. India's largest cement maker had itself reported a strong Ebitda per tonne of Rs 1,088, despite the lockdown impact.

Though the prices of inputs like pet coke and diesel have risen, the hike in cement prices -- coupled with operating efficiencies —would likely support profitability, too. Expanded capacities suggest that market share gains shall continue, thereby aiding volume growth. 

HSBC estimates suggest that FY21 per tonne profitability will be maintained at close to Rs 1,168, slightly higher than Rs 1,151 in FY20. Not surprising, the earnings growth momentum is expected to be maintained. MOSL says the stock is trading at 11.0x its FY22 estimated enterprise value (EV)/Ebitda (15 per cent discount to its 10-year average) and 35 per cent discount to Shree Cement (versus the historical average of 10 per cent).

Shree Cement, one of the most efficient cement players, is also expected to benefit from strong demand recovery, particularly in north, central and east India. The company predominantly caters for these regions. Shree’s stock price had corrected significantly against the backdrop concerns on cement volumes and demand for the sector, and premium valuations of its stock. The recovery should mean that the stock can regain high valuations after correcting over 20 per cent from July highs to September lows. Already, it has rebounded and gained 15 per cent since then. After the correction, HDFC Securities upgraded its ratings. Shree Cement, according to Modi of Reliance Securities, remains well placed for earnings growth and is among his picks.

Looking at capacity expansion (3.5 mt capacities completed in FY20)-led volumes growth, analysts are bullish on JK Cement. The company is also moving down the cost curve, helped by new capacities and planned upgrade of its older plants, which should drive up margins, according to analysts at MOSL who expect much higher volumes growth for the company than its peers. It is expected to report strong 23-25 per cent YoY volumes growth for grey cement in Q2; in wall putty, the expansion of 0.3 mt or 33 per cent of the existing capacities should accrue benefits from Q3FY21. The stock made fresh 52-week high on Friday and from Rs 1,649 levels, can see more upside looking at brokerage target prices of up to Rs 1,800.

Ambuja Cements, having exposure to the north and Gujarat regions, too, is expected to benefit and so should ACC, its pan-Indian subsidiary, which remains in a sweet spot, led by demand improvement. Demand, pricing, and rising clinker capacities are key to drive Ambuja’s prospects. The two companies had lagged in capacity expansions in the past, but have been spending on expansions lately and should see these capacities coming on stream by 2021, helping volumes and market share gains.  Among other picks of analysts include Dalmia Bharat and JK Lakshmi Cement.



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