In the near term also, margin pressure is expected to continue for cement companies due to rising costs, seasonally weak demand and weak realisation.
Cement Stocks: The cement sector has been under pressure for the last few months. During the last 6 months, cement stocks have fallen by 25 to 40 percent. In the near term also, margin pressure is expected to continue for cement companies due to rising costs, seasonally weak demand and weak realisation. Brokerage house Emkay Global says that the valuations of the cement sector have improved after a significant correction and there are good investment opportunities even in uncertain times. However, the target price of coverage companies has been cut by 5-20 percent.
Supply expansion expected to increase
Brokerage house Emkay Global says that the supply expansion in the sector is expected to be higher than the previous levels. However, consolidation may continue to pick up by FY2025 with 60 per cent incremental capacity by the top 4 groups. Expansion through M&A activity in the sector is an upside risk as it will lead to further consolidation and result in lower net capacity addition. This is positive for pricing discipline and LT returns.
Industry utilization is unlikely to decline with 7 per cent CAGR demand during FY22-25E even with effective capacity addition estimated at more than 90mt during FY22-25E (5.5% CAGR vs 5% earlier). The brokerage says that the possibility of pricing dispersion in the cement sector is very less.
Margins continue to remain under pressure
According to the brokerage house, in the near term, it is expected that due to rising costs, seasonally weak demand and weak realization will continue to put pressure on the margins of cement companies. Keeping in view the higher cost inflation and lower utilization levels than before, the brokerage house has cut its EBITDA estimates by 5-6 per cent for FY 2023/24/25. At the same time, the target price of coverage companies has been cut by 5-20 percent.
25-40% broken stocks in 6 months
The brokerage house says that in the last 6 months, there has been a correction of 25-40 percent in the prices of cement stock. After which the cement EV/EBITDA multiple is now 10 per cent below the 3-year average. On our modified Jun’23E TPs (previously Mar’23E), we consider the risk-reward to be favorable, even if the catalysts are 1-2 quarts away. A fall in the commodity price or an increase in the price of cement, at present, the risk reward is favorable and will act as a positive catalyst for the sector if the commodity prices fall further.
Which stocks to invest in
The brokerage house has chosen Ultratech and Shree Cement in large-cap, while Birla Corp in mid-cap and Sagar Cement in small-cap as top picks.
(Disclaimer: Stock investment advice is given by the brokerage house. These are not the personal views of The Financial Express. Markets are risky, so take expert opinion before investing.)
