The government’s push on infrastructure along with sustained demand courtesy affordable housing has turned analysts bullish on the cement sector. Besides, expectations of further price hikes, to ensure sustainability of the current hikes, further alleviate their concerns on sustenance of margins amid rising cost pressures.
Factoring-in an above-average demand growth of 9 per cent CAGR over financial year 2021-23, coupled with and limited new supply (4.6 per cent CAGR), analysts at global brokerage Morgan Stanley have raised their FY23 earnings estimates by up to 13 per cent, driven by better realization/margin assumptions.
“Valuation (on EV/EBITDA) is not cheap, but with improving growth visibility and return ratios, multiples tend to overshoot long-term averages, and investors’ focus should shift to two-year forward EV/EBITDA and free cash flow (FCF) yield, which are still attractive,” notes Gaurav Rateria, equity analyst at the brokerage in a co-authored report with Mukund Sarawogi.
A rise in non-trade demand, and continued demand from rural and individual home builders segments kept cement demand buoyant during January-February 2021. Data by Department for Promotion of Industry and Internal Trade show that cement output rose by 4.6 per cent MoM (but down 5.9 per cent YoY) in January 2021 while volumes transported by the Indian Railways were up 14.4 per cent YoY and 4.5 per cent MoM.
However, logistic hurdles in certain Southern regions, clinker scarcity, and limited large new capacity additions (barring the East region) led to a supply crunch, thus driving prices.
Effectively, all-India average cement price rose about 1.7 per cent month-on-month in February after three-straight months of decline, and are already higher by 4 per cent (Rs 15 per bag) in the first week of March 2021. While West and East regions saw average price hikes of Rs 10-20/bag, prices rose by Rs 5-15/bag in North and Central regions, and Rs 20-30/bag in South.
On a YoY basis, Mar’21-TD prices are sharply up 18 per cent in South, 11 per cent in West, 4-5 per cent in North and Central regions, and almost flat YoY in East.
That said, analysts note that cement manufacturers may have to further hike prices to ensure sustainability of margins amid rising cost pressures.
International average petcoke prices are up 14.8 per cent QoQ (up 62 per cent YoY) so far in Q4FY21, while domestic petcoke prices have risen 34.4 per cent QoQ (76.3 per cent YoY) for the same period. Similarly, average retail diesel prices across metros have jumped 8.6 per cent QoQ and 21.3 per cent YoY.
Analysts at Motilal Oswal Financial Services, thus, estimate Rs 200–250/t of cost inflation from power and fuel and freight costs, which should fully impact the profitability by Q1FY22.
“However, with the March price hikes, we expect the industry to largely pass on the cost inflation to customers. This should help sustain the strong margins of Q3FY21 in the near-term,” they note.
Earnings outlook and investment call
Highlighting that cement firms posted better than expected earnings both in Q2FY21 (over 40 per cent YoY Ebitda) and Q3FY21 (over 45 per cent YoY Ebitda) led by better than expected realisation and lower than anticipated cost escalations, ICICI Securities expects the overall EBITDA/te to grow by 7- 8 per cent YoY in Q4FY21.
MOFSL, meanwhile, forecasts Ebitda growth of over 25 per cent YoY in 4QFY21, driven by 20 per cent YoY growth in volumes. The brokerage is positive on UltraTech and Dalmia Bharat.
Sharekhan has a ‘Buy’ rating on UltraTech (target price: Rs 7,200), The Ramco Cements (TP: Rs 1,150), Shree Cements (TP: Rs 31,610), Dalmia Bharat (TP: Rs 1,900), JK Lakshmi Cement (TP: Rs 525), and Grasim Industries (TP: Rs 1,430).
Over the long-term, Morgan Stanley believes that any volatility/correction in stock prices in the near-term should provide opportunities to investors to enter stocks with a 12- to 18-month horizon
“Though we do believe there could be some downside risks to consensus F22 margins and Ebitda, we would still focus on FY23 margins, which should be among the best for the industry, supported by tight clinker supply across many regions during seasonally strong quarters,” the brokerage said.
The brokerage sees 27 per cent upside in Grasim (TP: Rs 1,700); 26 per cent in Ambuja Cement (TP: Rs 360); 17 per cent in Ultratech Cement (TP: Rs 8,000); 15 per cent in Shree Cement (TP: Rs 32,100); and 7 per cent in ACC (TP: Rs 1,950).