Brokerages count on the dynamics of the cement industry as the demand improved in September 2024, although below market expectations, following a lacklustre performance in July-August this year.
Axis Securities has maintained a positive outlook on the sector from a medium to long-term perspective. The brokerage expects demand to grow 5-7 per cent in FY25, driven by resumption of infrastructure projects, Govermnet’s focus on infra development and sustained real-estate activity. It added that the third quarter of FY25 is expected to be a pivotal period for cement demand, with the base effect from Q3FY24, which saw subdued demand, setting the stage for potentially stronger double-digit growth.
UltraTech Cement, Ambuja Cement, Dalmia Bharat, JK Cement, Star Cement are Axis Securities’ top picks.
PL Capital upgraded Ambuja Cements stock from ‘accumulate’ to ‘buy’ call with a revised target price of ₹756 against ₹701 earlier. The brokerage’s top picks in the sector also include ACC and Ultratech Cement.
Nuvama Institutional Equities has maintained neutral stance on the sector anticipating consolidation in the space.
Analysts of ICICI Securities, also neutral on the sector, have recommended ‘buy’ call on Ambuja Cements. They also project EBITDA to plunge 26 per cent y-o-y. “With competitive intensity unlikely to abate over the next few years and ‘consolidation virtues’ proving to be a myth so far, we see risk to FY26 earnings as well,” they added.
Meanwhile, Axis Securities quoted that the acquisition of Penna Cement by Ambuja Cements and the acquisition of India Cement by UltraTech Cement indicate a trend toward higher consolidation within the cement industry.
Nuvama said that the second quarter has been “seasonally tepid with subdued demand along with weak pricing.” It observed that the earnings downgrades for FY25E/26E are on the cards considering the volatile pricing environment. The brokerage has recommended buy rating on JK Cement and ACC and a hold call each on UltraTech Cement, Ambuja Cements, Shree Cements and Grasim Industries.
Pricing and cost
Yes Securities said that the sector may witness some respite from the cost front considering stable diesel prices, higher usage of green energy, and other cost initiatives.
However, the decline in cost may not cushion the overall impact of lower cement prices and subdued demand contributing to the overall decline in profitability.
Analysts of Elara Securities also expect a gradual recovery in cement demand in the upcoming quarter, which should enable the sector with the bandwidth to take some price hikes.
Noting that cement prices are expected to trend higher on plans to implement price hikes again in October 2024, Axis Securities stated that the sustainability of these higher prices remains a challenge.
EBITA margin to shrink
Axis Securities anticipated that EBITDA margins are expected to shrink by 220 bps y-o-y and by 230 bps q-o-q, reflecting the challenging operating environment and pricing pressures.
“Sluggish demand, weak pricing and operating deleverage are likely to drag EBITDA for our coverage by 15 per cent y-o-y (down 23 per cent q-o-q),” Nuvama’s report read.