Cement Sector Stocks To Strengthen In Q1FY22 Due To Sharp Price Hike

As hopes of normalcy returning to the economy get strengthened, there is an increased business activity in the construction and infrastructure sector. Due to this, the demand for construction materials like steel and cement shot up in February and March. The demand, along with the expected hike in cement prices, has led to brighter prospects for top cement stocks in the sector.

In this backdrop, leading brokerages have undertaken channel checks and have concluded that based on the increased activity, the cement sector stocks will perform better in the fourth quarter  2020-21 and are expected to continue better performance in the first quarter (April-June) of the new financial year 2021-22.

Prabhudas Lilladher (PL), the brokerage house, has stated in its channel check report released last week that February 2021 was the best month for the cement sector since September 2020. All-India cement demand is estimated to grow by 8 per cent in February on a base of +4 per cent. 

PL has rated the quality of growth in cement demand as far better than September-November’20, where growth was largely led by pent-up demand and a weak base. Among regions, North and East maintained outperformance over other regions with demand growth at 15 per cent Year-on-Year (YoY) each. 

Demand in the Central region is estimated to have grown by 7 per cent. Western region’s demand grew by 4 per cent on the back of a mild recovery in Maharashtra. While demand in the South remained muted with flattish growth, it said.

The cement price recovery is delayed due to intense competition in wake of strong demand. Cement dealers across regions expect sharp price hikes in March. 

Channel checks undertaken by Motilal Oswal Financial Service Limited (MOFAL), another brokerage house, suggested that the much-anticipated price hikes have materialized in March, with prices up by Rs 20–30 per bag Month-on- Month (MoM) in South and East and Rs 10–15 per bag in other regions. Demand remains strong, with growth in the high single digits in most regions (except South), which should help absorb these hikes. 

These hikes should also alleviate concerns on near-term margins from the sharp cost inflation seen in the last few months – petcoke, coal, and diesel prices are up 74 per cent, 24 per cent, and 34 per cent YoY, respectively. 

However, PL remained doubtful of the price rise in March due to year closing led volume push. Factoring flattish prices MoM in March, “We estimate realisations to fall Rs 80-100/t QoQ in fourth quarter 2020-21. However, this trend will reverse in April with a steep price increase of Rs20-30 per bag on the back of tight discipline, higher costs, and lessened competition intensity”, PL said.  

Outlook on the cement sector strengthened significantly due to revival in the housing market, government's strong focus on spending, and pick-up in the industry wide capex cycle. This is visible via flattish demand in 2020-21, against estimates of a 5-10 per cent decline. “Given the weak demand base over the last eight years, compounded annual growth rate (CAGR

MOFSL expects earnings before interest, tax, depreciation, and amortisation (EBITDA) of cement stocks under its coverage, to grow more than 25 per cent YoY in 4QFY21, driven by ~20 per cent YoY growth in volumes (low base due to covid induced lockdown in Mar’20). 

Ultratech Cement (NSE closing price 10th March, Rs 6,715) is the most favourite stock of both the brokerages, which is expected to outperform its peers. Among the other preferred stocks include ACC (Rs 1,836.15) from the large cap space and among the mid-cap category, Dalmia Bharat (Rs 1,469.25, BSE) and JK Lakshmi Cement (Rs 429) are expected to perform better. 

MOFSL does not expect much upside in Shree Cement (Rs 27,580), Ramco Cement (Rs 1,017), and Ambuja Cement (Rs 291.70), whose potential market share gains are already priced in.