Short Call | Cement conundrum: Housing, construction setbacks and valuations that don’t add up! Power Grid, Piramal Pharma in focus

Short Call

India’s housing and construction activity is facing a serious roadblock, with new housing launches and sales seen plummeting by 11 percent and 18 percent, respectively, in the July-September 2024 period across the top nine cities, according to PropEquity. Uttar Pradesh, a major player in the construction market, is particularly hard-hit.

As cranes slow down and projects slump, cement demand is experiencing a significant crunch, creating challenges for cement companies. This downturn arrives at a particularly tough time for cement makers, who have already reduced production by 10-15 percent across North, Central, and East India in Q2.

Weak price realisations are compounding the pain, with companies offering trade discounts to keep sales moving. Major infra projects, including railways and roads, remain stalled post-monsoon, further squeezing demand and adding to the industry’s woes.

Moreover, rising raw material costs are biting into margins, setting cement firms up for a bleak H1 FY25. Despite plans to add 35-40 million tonnes of capacity in the coming fiscal, particularly in the East and South, the current market conditions could make those ambitions an uphill battle. To add insult to injury, the market is raising serious red flags about the sky-high valuations of India’s cement firms.

Kotak Institutional Equities has flagged the eye-watering $100 billion market cap of listed cement firms, calling it “increasingly unreasonable.” Their analysis shows that to justify these figures, companies would need to sell a near-impossible 40-60 billion tonnes of cement over the next 30 years—an almost impossible feat given India’s economic trajectory.

India's cement market reached 396.7 million tons in 2023, with FY24 projections at 419 million tons, and demand expected to double by 2030. In contrast, China sold 44 billion tons from 1995 to 2023 while experiencing a 12 percent CAGR, underscoring the unlikelihood of India achieving such ambitious sales targets with its slower projected growth rate of 7 percent.

As demand wanes and costs climb, the lofty market caps of cement companies are blaring sirens unless a rapid recovery in the housing, and construction sector takes hold. For now, cement firms are staring down a potentially harsh second half of FY25.

Power Grid (Rs 364.2, 4.04%)

Gained on the Ministry of Power’s National Electricity Plan.

Bull Case: According to international brokerage Goldman Sachs, Power Grid is set to be the key beneficiary of any transmission-related capex undertaken by the government.

Bear Case: Rising competitive intensity is a key drawback. Additionally, price volatility in key commodities and components can impact margins

Piramal Pharma (Rs 226.4, +4.5%)

Shares gained after the company outlined its ambitious roadmap at a recent analyst meeting, targeting $2 billion in revenue by CY30.

Bull Case: Potential tailwinds from the US Biosecure Act could accelerate growth. Plans to reduce the net debt to EBITDA ratio from 3x in FY24 to 1x by FY30. Plans to focus on organic and inorganic growth, aiming for acquisitions that offer synergies, meet profitability targets, and enhance return ratios.

Bear Case: Rising competition in the Complex Hospital Generics (CHG) segment. Stock has already surged over 76 percent from April to September which may invite profit-booking.

(With inputs from Neeshita, Zoya)

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