Cement stocks are on investors' radar; brokerages turn positive on the sector

JM Financial is selectively positive on Shree Cement, Ultratech Cement, Dalmia Bharat and JK Cement.

Even though demand is not yet back to the pre-COVID level, cement stocks are gaining due to improving demand scenario and increase in realisation.

Since November 2020 to date, shares of Dalmia Bharat, JK Lakshmi Cement, Deccan Cements, JK Cement and Ultratech Cement have jumped up to 30 percent.

As per brokerage firm, Antique Stock Broking, industry volume growth is now pegged at flat YoY for FY21 against an over 10 percent YoY decline estimated at the start of the year.

"Industry's ability to push up and maintain pricing (further backed by aggressive cost cuts) amazed even more as the industry registered record profitability in H1FY21. Such is reflected in revision in annual EBITDA estimates for most companies which are now approaching what street was projecting pre-COVID," said Antique.

The brokerage firm highlighted that healthy cash flows, backed by higher profits, improved working capital and lower CAPEX intensity have bolstered the sector-wide balance sheets.

Antique expects sentiments to remain strong heading into the busy construction season as utilisation will pick up further from here and price action will also follow from Jan-Feb.

"With all guns blazing, cement stocks have remained in the flavor and are now trading close to mid-cycle multiples. While the announcements on new expansion plans may be a small dampener, sustained demand recovery will keep up the stock sentiments and is a key monitorable," Antique said.

The brokerage estimates industry EBITDA to grow 10 percent CAGR over in FY20-FY23 (revised upwards by 1-5 percent).

"In terms of picks, we like Ultratech as our top pick, followed by Ambuja/ACC. For ACC, Ambuja, clarity on royalty change will be watched closely. In mid/small-cap space, we find Birla Corp, Dalmia, JK Lakshmi as most attractive, while recommending accumulation of JKCement on dips," said Antique.

Sean Darby, Global Head-Equity Strategy at Jefferies expects growth in the property and construction sectors and expects this to be a trigger for cement and steel demand.

“A lot of the growth in the economic numbers will revolve around the property and construction sectors and in that respect, one of the best proxies would be the cement, steel and also to some extent the banks as well,” he told CNBC-TV18.

Growth CAPEX is gradually picking up the pace of increasing comfort and visibility on volume growth.

"Due to the reduction in cost especially power and fuel, cement companies' margins have improved. There is a pick-up in non-trade segment cement demand as labourers issue is getting resolved as labourers are coming back to work after the festive season," said Keshav Lahoti, Associate Equity Analyst at Angel Broking.

"Due to the improving demand scenario, companies are planning for fresh CAPEX. We continue to be bullish on the cement sector. Our preferred pick from large-cap is UltraTech Cement and mid-cap space is JK Lakshmi Cement," Lahoti said.

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