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UltraTech, Ramco Cements: Analysts see significant upside in cement stocks

Finance Minister Nirmala Sitharaman recently hinted at a Rs 100 trillion infrastructure drive to be unveiled in the coming weeks in a bid to kick-start the waning economy. The move follows abysmal gross domestic product (GDP) for the September quarter which sank to over six-year low of 4.5 per cent. READ HERE

Amid the gloomy GDP print; however, what is noteworthy is that the government spending rose sharply to 15.6 per cent during the quarter, as against 8.8 per cent in 1QFY20.

According to India Ratings and Research, the Indian arm of Fitch Group, combined capital and consumption expenditure of central and 20 states government in Q2FY20 grew 37.8 per cent (Q1FY20: -18.3 per cent, Q2FY19: 11.7 per cent) and 20.1 per cent (Q1FY20: 4.1 per cent, Q2FY19: 14.7 per cent), respectively.

Given this, analysts see a significant upside in the cement stocks that have, so far in calendar year 2019 (CY19), remained underperformers at the bourses.

Among the listed companies, only 9 stocks have given positive returns. JK Cement has been the top performer, up 62 per cent on the BSE till Monday (December 2). It is followed by The Ramco Cements (up 24.4 per cent), Mangalam Cement (up 24 per cent), Heidelberg Cement (up 23 per cent), and Shree Cement (up 21.4 per cent).

On the downside, Sagar Cements, Dalmia Cement, The India Cements and Star Cement have slipped up to 23 per cent.  

In comparison, the benchmark S&P BSE Sensex has gained 13 per cent during the same period, ACE Equity data shows.

 “Q2FY20 witnessed realisation gains by most cement companies despite demand being tepid in the monsoon season. Supply discipline by the cement companies is largely reflected in the dent in volume (flat/down YoY). On an aggregate basis, companies under our coverage saw a 1.8 per cent YoY slid in sales volume,” wrote analysts at Centrum Broking in a sector review report.


Likely pick-up in demand, hopes of increase in budget allocation for housing/infrastructure projects, lower fuel/freight prices, and interest rate cut by the Reserve Bank of India (RBI) are some of the major factors that, as per experts, will support cement stocks in the coming quarters.

“We expect cement demand to improve in H2FY20 as wet weather has subsided and the new government has already launched measures to boost housing/infrastructure projects,” wrote Jigar Shah, chief executive officer (CEO) at Maybank Kim Eng Securities India, in a co-authored sector report, with Vishal Periwal.

According to Binod Modi, a senior research analyst at Reliance Securities, steep correction in the stock prices make current valuations attractive.

“Infrastructure creation had been slow so far, which has impacted cement prices. However, since the rural demand is growing at 3-4 per cent owing to consumption-driven slowdown, the economy will have to be pushed via infrastructure projects,” he says.

All-India average cement price remained broadly flat on month-on-month (MoM) basis at nearly Rs 305-310/bag (+3.2 per cent YoY) mainly led by 3.2 per cent MoM price recovery witnessed in Southern Northern, western and eastern regions broadly ended flat to marginal improvement, while the average realisation in central region declined by about 2.4 per cent MoM during November, according to a report by Reliance Securities.

“Sharp pricing recovery seen during Feb-May’19 is expected to aid cement companies’ performance in H2FY20 as well with all-India average prices YTD rising by approximately 5.5 per cent, which should also be supported by moderation in fuel and input cost,” the brokerage firm added.

Among stocks, most analysts are bullish on UltraTech Cement on the back of recently announced capex of Rs 9.4 billion to setup 2.2 mnt greenfield grinding unit (GU) at Odisha and 0.6mnt/0.6mnt brownfield GU at existing units in Bihar/West Bengal which are expected to be commissioned by Q4FY22e.

"The company has completed acquisition of Century Cement (CC) and will start selling products under UltraTech brand from Dec 19... It is estimated to pay additional royalty of Rs70/t from Q3FY20E post acquisition of CC," say analysts at Prabhudas Lilladher. The brokerage sees nearly 18 per cent upside in the stock, and has a target price of Rs 4,850. The P/BV valuation for 2019, 2020 and 2021 are estimated at 4, 3.1 and 2.8, respectively.

ICICI Securities, too, remain bullish on UltraTech Cement. Other stock that the brokerage is bullish on is The Ramco Cements.

Centrum Broking, on the other hand, has "sell" rating on Shree Cements, JK Lakshmi Cement, India Cements and ‘Reduce’ rating on ACC, HEIM, JK Cement.  It continues ‘ADD’ rating on UltraTech & The Ramco Cements. 

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