Leading brokerage firm Sharekhan has placed a buy call rating on the shares of Shree Cement for a target price (TP). 26000, Ultratech Cement (TP: 7100), Grasim Industries (TP: 1740), The Ramco Cement (TP: 850), JK Lakshmi Cement (TP: 600), and Dalmia Bharata (TP: 1850). These recommendations were made because the brokerage estimates that the cement sector will add over 90 mtpa in capacity between FY2023 and FY2025, as per the plans put forth by the major cement players.
The brokerage said in a note that “the cement industry is expected to add over 90 mtpa in capacity in FY2023- FY2025 as per the plans announced by the major players. This means 5% CAGR in installed capacity, while cement demand is projected to post 6-7% CAGR in FY2023-FY2025. With the increase in supply almost equal to the increase in demand, the level of industry capacity utilization will remain almost flat at 67-68% over FY2023- FY2025. Pan-India cement prices have risen every year except for a few years during FY 2015-FY2022, while in Q1FY2023, they are up 8% as compared to FY2022 levels. Going by historical anecdotes, we believe that cement prices will continue to remain on an upward trajectory in the next three years despite capacity additions. On the cost front, international petcoke prices have declined by 17% and 20% in June 2022 from March 2022 levels.”
According to Sharekhan “Diesel prices in Metro declined by 5% in June 2022 as against 3% year-on-year. We expect a reduction in petcoke/coal prices during Q1FY2023 and in operating performance for the industry from H2FY2023 expects to reflect as it completely eliminates high cost fuel inventory during H1FY2023. We anticipate that our cement coverage universe will report 11% CAGR in sales volume in FY2022-FY2024 , while the industry growth is estimated at 6-7% p.a. The growth is expected to be higher than the industry due to increase in market share by large companies aided by capacity addition.”
The brokerage has claimed that “We anticipate that the weighted average EBITDA/tonne for our coverage universe will grow at 4% CAGR during FY2022- FY2024, although it may remain lower than the peaks seen in FY2021. The improvement in EBITDA/TONE is based on our assumptions of capacity utilization due to higher capacity addition, partial retention of increase in cement prices and easing of energy and freight costs.
Staying positive on the cement sector, Sharekhan has said “Our cement coverage universe saw a 30%-45% improvement in stock prices in the last five months due to the Russia-Ukraine crisis, escalating energy costs and large capacity plans announced by major cement companies.” This has resulted in the one-year forward EV/EBITDA valuation multiples of almost all cement companies falling below their historical averages. Despite the soft earnings performance for the cement pack in the first half of the financial year, the recent correction is long-term. Provides good entry points for investors as easing input cost pressures in H2FY23E along with promoting sustainable infrastructure over the next 3-5 years will boost the performance of the stock in the next 12 -15 months. Stay tuned and positive on the sector. Our preferred picks are UltraTech, Shree Cement, Dalmia Bharat and JK Lakshmi Cement.”
Sharekhan said weakness in demand, fall in cement prices and increase in key input costs like energy and freight cost are major risks for the industry, which investors should pay attention to.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.