Most cement stocks are on course to wind up the calendar year 2020 on a positive note and analysts belives the sector may continue to witness traction in the year 2021, too.
Cement companies have gained between 65 percent and 165 percent from the March lows.
The cement sector had started the calendar year 2020 on a positive note but the COVID-led disruption hit the sector hard.
During the 'Unlock' phase, manufacturing resumed and the positive developments started with industry dispatches picking swiftly, upward revision in estimates.
In a broader sense, the year 2020 was a remarkable one for the sector. While most analysts were of the view that the sector will see degrowth in FY21, the current trend shows that the sector will show a flattish growth for the ongoing financial year.
"With COVID-led lockdown imposition in March 2020, the initial expectation for the street was an industry de-growth of 15-20 percent YoY for FY21E. However, buoyant demand scenario in rural and IHB segment combined with support from off-take in government infrastructure projects provided a fillip to the industry with current revised expectation of flattish growth for FY21E," said Kunal Shah, Analyst – Institutional Equities, YES SECURITIES.
He further added, with the support from higher cement prices across all regions coupled with lower input costs in the form of pet-coke translated into lifetime high profitability for cement companies during the first half of FY21.
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.
The road ahead
Brokerages and analysts are positive about the sector for the year 2021 and believe that demand recovery will be robust and earnings upgrades will continue in the coming year.
"We continue to maintain our positive stance for CY21 as we expect consensus earnings upgrade to continue. With improving volumes/prices, investors are likely to get more convinced about the sustainability of profitability," said brokerage firm ICICI Securities.
"Consensus FY21E / FY22E EBITDA has been upgraded by 25percent/15 percent during H2CY20; our estimates are about 10 percent ahead of consensus," the brokerage firm added.
Rural and semi-urban housing coupled with government-led infrastructure will be the key demand drivers for the sector.
ICICI Securities is of the view that demand recovery likely to be robust with 13-14 percent YoY growth for FY22E on a low base (2-3 percent YoY decline in both FY20 and FY21E), resulting in 6 percent CAGR over FY20-22E.
Industry consolidation may also increase further with a share of the top six companies in the respective regions ex-South likely to increase from 67-80 percent in FY19 to 77-85 percent by FY23E. A few more M&As (including that of JPA) may result in further consolidation, said ICICI Securities.
The sector has outperformed broad indices over the past decade and delivered robust returns. ICICI Securities expects this trend to continue.
Market expert Prakash Diwan is positive on the cement sector.
"Cement as a whole is seeing pricing power and retention of margins, which is good news. I am positive on this sector and we have been talking about this for quite some time," he told CNBC-TV18.
According to him, the government is going to look at pockets of influence where it can make a difference in the employment scenario for the economy.
"Real estate and construction happened to be the one. To play that growth, cement is a great proxy and cyclical always do well when the tide is turning. So I think it is a cycle that has just started. UltraTech definitely has momentum backing it, it is the leader, it has capacities that could give it pricing power also and we have seen that happen," Diwan mentioned.
Shah of YES SECURITIES believes profitability for the sector to have peaked out in Q2FY21E as he expects the industry to witness pricing pressure and a pinch of higher input costs from 2021 onwards.
"We expect pricing in East to be under severe pressure as the total capacity of about 8 MTPA is expected to commissioned in 2021. Further, we estimate pricing discipline to be perturbed in South in 2021," Shah said.
He expects stocks like Birla Corp and Sagar Cements in small caps to outperform as they commission their capacities in 2021 while he prefers UltraTech Cement in large-caps post its recent CAPEX announcement.
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