Shares of cement companies such as ACC, Ambuja, Ultratech, Shree Cements, that were on a roll over the past two weeks, are now on a slide. Last fiscal, most of them gained between 1 per cent and 35 per cent, but Shree Cement was down.
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According to analysts, over supply and valuation concerns on the one side and healthy demand due to infrastructure push by the government on the other will keep these stocks colourless at the bourses. However, companies that manage margins well despite pricing pressure will see buying interest, they added.
Of the five trading days on the BSE in the past week, ACC traded in the red on four days; Ambuja Cements on two days; Andhra Cement on three days; India Cements on two days; JK Lakshmi on all the five days, while Ultratech was in the red for three days.
Vincent KA, Research analyst, Geojit Financial Services, said. “Valuation of most of the cement companies is above average. Cement prices are gradually coming down. There will be pressure on revenue growth though volume growth won’t suffer. Going forward, we suggest investors to follow Buy on dips strategy.” The sustainability of the recent price hikes undertaken by the cement companies is to be kept on watch amidst the elections and upcoming monsoon season, he added.
Sunil Damania, Chief Investment Officer, MojoPMS, told businessline that demand-supply issues with the scales tilting in favour of supplies side is causing a zigzagging trend in cement stocks. There’s a consolidation exercise happening in the sector with the focus on small and medium sized companies with attractive valuations.
“The outlook for the sector is challenging. Sporadic jump in cement prices is seen. We would recommend a Buy strategy for small and medium size companies while it would be a wait-and-watch for large companies in the sector. “
ICICI Direct has a Buy rating for ACC and Ramco Cements Ltd and has revised the target price upwards for both at ₹3,225 and ₹1,000, respectively. On the BSE, shares of these cement majors ended at ₹2,440.40 (down 0.06 per cent) and ₹811.30 (up 0.23 per cent).
Sharekhan has given a Buy rating for UltraTech Cement with a TP at ₹11,900.
Cement companies, despite high growth potential from infrastructure development, haven’t impressed Kotak Institutional Equities analysts. In a recent report, they express confusion over the market’s persistent optimism toward the sector’s profitability, despite frequent earnings downgrades. Kotak highlights the capital-intensive and commoditised nature of the cement industry, noting a significant gap between market sentiment and valuation methods. They argue that low asset turnover ratios, particularly for expansion and greenfield projects, will limit valuations. Yet, many cement stocks trade at multiples far exceeding their return on equity metrics, despite expectations of reasonable profitability.
ICICI Securities sees pricing volatility to be the order of the day given the huge capacity addition amidst industry-wide race for capacity share. “We prefer to remain Neutral on the sector,” the note added.
However, Prabhudas Lilladher has a Buy rating for Shree Cement, ACC and Ultratech; while it is Accumulate for Dalmia Bharat and Nuvoco Vistas. Realisation is expected to decline nearly 5 per cent q-o-q (-3 per cent y-o-y) for Q4FY24. Cement players had undertaken price hikes during Sept-Oct’23, which was largely rolled back in the past few months. But, volume growth will be resilient, added the brokerage in its recent report.
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Though affordable housing, positive outlook on real estate and the recently-released BJP’s manifesto emphasising infra development, declining raw material costs are all set to brighten the prospects of cement sector, companies are most likely to see margin pressure and a moderation in demand in the long-term because of higher base. So, analysts see a mixed bag for this sector and most of them prefer a wait and watch approach, Damania said.