Top Picks of Cement Sector: Indians cement sector From rising interest rates over the past few quarters to higher cost pressures, ceramics, paints and adhesives, pipes, wood panels, cement, and steel. It has also seen two major incidents in recent months. One, the Adani Group has announced the acquisition of Holcim India The valuations of the companies (Ambuja and ACC) are close to USD175 per tonne. Two, ultratech has announced that it will spend 128 billion rupees to increase the capacity to 22.6 million tonnes (at a capital cost of USD75 per tonne). As a result, cement stocks fell over 30 per cent and found themselves on the list of worst-performing stocks of the past week.
However, analysts at ICICI Securities suggest that there was a significant recovery in demand in June, 2022 due to pre-monsoon push, buoyancy in infrastructure projects, lower steel, cement etc. prices and better labor availability.
In a note, the brokerage house said: “The month may see growth in the mid-teens, both MoM and YoY, volume CAGR of 6 per cent on 3-year basis. With all India utilization of around 78 per cent, the industry is likely to witness its second highest volume in the last seven months after reaching its peak in March’22. Of the Rs 50-55/bag price hike announced in mid-April ’22, Rs 35-40/bag has been withdrawn in North, Central and Eastern regions, while only Rs 10-15/bag has been withdrawn. In the west at YTDQ1FY23. Prices in the south remain broadly similar QoQ in Q1FY23-TD, with dealers expecting price hike announcements soon. We believe that companies will be able to increase QoQ cost in Q1FY23E as well and average EBITDA/te QoQ is unlikely to fall (although it may continue to reduce YoY).
Speaking about the near-term triggers in the cement sector, the note stated that “(a) the asset-based valuation around the long-term average -1SD is attractive after stock price correction >40 per cent in the last seven months.” (b) any sharp reduction in fuel costs; (c) price rise in the south: With the south entering a weak period of monsoon, which extends to December ’22, the region will have a near future apart from raising prices soon. There will be no alternative, in our view; (d) Price hike in Monsoon: Given that the exit prices from June’22E are 2 per cent lower than the Q1FY23E average and demand is relatively strong, companies may consider the QoQ cost hike in Q2FY23E Prices may increase in monsoon to reduce
Top Cement Sector Picks
ICICI Securities said in its note that UltraTech Cement (UTCEM) and Shree Cement (SRCM) continue to be their top picks.
UltraTech Cement (UTCEM)
The current market price of UltraTech Cement is up by 0.08 per cent at Rs 5,433 (around 12:03 pm). The stock has touched its 52-week high and 52-week low at Rs 8,269 and Rs 5,410 respectively.
The company reported a 47.6 per cent year-on-year jump in its consolidated net profit at Rs 2,620 crore for the quarter ended March 31, 2022. It also has excellent dividend track report and has declared dividend continuously for the last 5 years.
ICICI Securities has given a ‘Buy’ rating to the stock with a target price of Rs 8,500.
Shree Cement (SRCM)
The current market price or CMP of the stock at the time of writing of the report is Rs 19,233.30. The stock’s 52-week high and 52-week low are Rs 31,469 and Rs 19,080 respectively. The company has a good dividend track record and has paid dividend consistently for the past 5 years without any failure.
The company’s outlook is strong as it is using shareholders’ money effectively and its ROE is improving. It announced a 16 per cent decline in its standalone net profit at Rs 645 crore for Q4 ended March 31. There has been a growth of 15 per cent in revenue from Rs 3,552 crore in the previous quarter.
ICICI Securities has given ‘Buy’ rating to the stock with a target price of Rs.
27,000.
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