Tue. Sep 26th, 2023

The leading brokerage firm Sharekhan has placed a buy call rating on the shares of Shree Cement for a target price (TP) of ₹26000, Ultratech Cement (TP: ₹7100), Grasim Industries (TP: ₹1740), The Ramco Cement (TP: ₹850), JK Lakshmi Cement (TP: ₹600), and Dalmia Bharat (TP: 1850). These recommendations were made because the brokerage forecasts that, in accordance with the plans disclosed by major cement players, the cement sector would add more than 90 mtpa in capacity between FY2023 and FY2025.

The brokerage has said in a note that “Cement industry is expected to add over 90 mtpa in capacities over FY2023- FY2025 as per plans announced by major players. This implies a 5% CAGR in installed capacity, while cement demand is estimated to post a 6-7% CAGR over FY2023-FY2025. With the rise in supply almost equivalent to demand growth, industry capacity utilizations levels would stay almost flat at 67-68% over FY2023- FY2025. Pan-India cement prices have risen each year during FY2015-FY2022 barring a couple of years, while in Q1FY2023, they are up 8% as compared to FY2022 level. Going by historical anecdotes, we believe cement prices to remain on an uptrend despite capacity additions over the next three years. On the cost front, International petcoke prices have corrected by 17% m-o-m and 20% from March 2022 levels in June 2022.”

According to Sharekhan “The diesel prices across Metros declined by 5% m-o-m while they were up 3% y-o-y in June 2022. We expect the easing of petcoke/ coal prices during Q1FY2023 and ahead to reflect in operational performance for the industry from H2FY2023 as it exhausts high-cost fuel inventory fully during H1FY2023. We estimate our cement coverage universe to report 11% CAGR in sales volume over FY2022-FY2024 as against industry growth estimated at 6-7% per annum. Higher-than-industry growth is expected to be lead by market share gains by larger companies aided by rise in capacities.”

The brokerage has claimed that “We estimate weighted average EBITDA/tonne for our coverage universe to grow at 4% CAGR during FY2022- FY2024 although the same may remain lower than peaks seen in FY2021. The improvement in EBITDA/tone is based on our assumptions of capacity utilizations remaining almost flat due to high capacity additions, part retention of growth in cement prices and easing of energy and freight costs.”

By staying positive on the cement sector, Sharekhan has said “Our cement coverage universe has seen 30%-45% correction in stock prices over trailing five months led by Russia-Ukraine crisis, rise in energy costs and large capacity plans announced by leading cement players. The same has led to one year forward EV/EBITDA valuation multiples of almost all cement companies sinking below their historical averages. Notwithstanding, soft earnings performance for the cement pack in H1FY23, the recent correction offers good entry points for long term investors as sustainable infrastructure push over next 3-5 years coupled with easing out of input cost pressure in H2FY23E would drive stock performance over next 12-15 months. We remain construction and stay Positive on the sector. Our preferred picks are UltraTech, Shree Cement, Dalmia Bharat and JK Lakshmi Cement.”Weakness in demand, a decline in cement prices and a rise in key input costs like energy and freight costs are key risks to the industry, said Sharekhan, which investors should take note of.

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