Cement prices finally on the rise: Bet on these stocks

On a year-on-year basis our expectation that prices should move up in the range of 3-5 percent depending on the region to region but we expect price recovery to sustain from here on that will definitely lead to some improvement in earnings for cement companies. 

Anuj: In largecap space your preferred pick is UltraTech Cement, that has done well of late. You like it at current valuations? 

A: UltraTech is a stock which we have been liking for a long time. We definitely believe that UltraTech will have a consistent re-rating story from hereon also. So, we do see a potential upgrades to price target even on the current price target Rs 3,700. We do like UltraTech.

Sonia: Some of the smaller ones you like are names like Dalmia Bharat?

A: Dalmia Bharat is one of the stocks where we have all the triggers for earnings. Volume growth is there; their efficiencies are doing very well. So, they are one of the most cost efficient players in the industry today. They are sitting on a sweet spot in all the three pockets. So, east, north-east and south-east all the three pockets are expected to do very well in FY17 and FY18. So, that is reason we like Dalmia Bharat in the midcap space.

Anuj: Just let go back to UltraTech point for a bit. Compare it to say Ambuja Cements or ACC. ACC of course has been rank underperformer but why would you pick an UltraTech over say both ACC and Ambuja? A: We always believe the valuation multiple is always driven by the capacity. In case of ACC except for the cost efficiencies coming into the company we don’t see any other material trigger except for the expansion which they are going to commission in Jamul. UltraTech they would be multiple triggers at different points of time so the immediate trigger would be cost efficiencies which they are coming into the company with high usage of petroleum coke.  We understand that the company will increase the pet coke usage to 75 percent and then from here on to 85 percent in the next couple of years. They have been adding capacities for a very long time and with the JP coming into picture by end of FY17 we see FY18 to also get some multiple re-rating on the valuation front because of the capacity addition. In terms of the bargaining power in the industry, we believe there would be multiple reasons why UltraTech can be a buy.  In case of ACC or Ambuja we definitely believe that except for cost efficiency which I spoke of we don’t see any other trigger in terms of an earnings surprise. So, there is no structural change in their operating metrics etc. Especially in case of ACC and Ambuja and that is the reason we would prefer to go with UltraTech only in the largecap space.

Sonia: The other stock that you are looking at JK Cement, this stock has not really given too much by way of returns in the past which is looking at the chart. Up until 2015 it had a great run but since then it has not giving shareholders any returns. What is the trigger from here on? A: JK Cement is only company which also has advantage of white cement business and that business is doing very well for them. Except for that JK Cement in recent past they had some concerns with one of the plants. That was one of the operating reasons why the stock performance got hampered. However, these issues have now been addressed, so we expect that from quarter two onwards we will see volume growth and efficiencies both coming into JK Cement. They had a huge disadvantage of one of the plants being inefficient in North India and that issue has also been addressed.  So, in FY17 and FY18 perspective we are seeing a lot of efficiency improvement at least Rs 200 per tonne of cost improvement happening in JK Cement that is what we are expecting. With the white cement advantage they are definitely bound to outperform the peers in cement midcap space.