UltraTech Cement, Dalmia Bharat among top picks for Jefferies and CLSA; here’s why

Foreign brokerages are betting on Indian cement manufacturers on falling energy costs and an expected jump in volumes in the election season ahead.

“India cement sector is likely to be a big beneficiary of declining global energy costs (petcoke/coal are down 35-60 percent YoY) with benefit starting in 4QFY23 and accelerating into FY24, if trends sustain,” Jefferies said in a note to clients. The brokerage firm likes companies that have the potential to outperform the industry on a volume basis.

The benefit of falling spot energy costs was none or marginal for most cement players till the December quarter due to high-cost fuel inventory position, and will start reflecting from the March quarter, and accelerate into FY24, it said.

Cement manufacturers have seen earnings cut in the past few quarters as price hikes lagged cost increases. Based on the pricing trend in the past few months, Jefferies sees cement players focusing on volumes instead of prices in the near term.

Some analysts have pointed out that cement price hikes could not hold up with companies rushing to fulfil their year-end volume targets, and cost optimisation or savings are keys to better performances.

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Jefferies said demand is strong due to pre-election-led infrastructure spending by various state or central governments, and companies are using this opportunity to boost volume growth as there is spare capacity in the system even though utilisation has improved.

“We have seen similar instances in the past where producers focused on volume when demand is high and have not resorted to price increases despite improvement in utilisation,” the brokerage said. Jefferies expects earnings of UltraTech Cement, Dalmia Bharat and JK Cement—which are its preferred picks in the cement sector—to outperform the industry given the strong capacity addition line-up.

What CLSA says

Meanwhile, UltraTech Cement and Dalmia Bharat are also preferred bets for CLSA in the cement space. The brokerage sees several catalysts for the cement sector over the next few quarters and does not see a rollback of recent price hikes as negative. However, the current valuations leave limited room for further re-ratings, the brokerage firm cautioned.

As per a report by Crisil, demand is expected to outpace supply, which is expected to grow at 6-7 percent compounded annually, keeping utilisation levels at more than 70 percent at pan-India levels.

Capacity addition

Cement companies are expected to add 145-155 million tonne (MT) of capacity in FY23-27, from the current 570 MT, translating to a compounded annual growth rate of 4-5 percent, the credit ratings agency said. ICICI Direct Research expects an addition of about 30 MT of new capacity annually taking the total capacity to 650 MT by FY25.

The majority of the capacity addition was done by UltraTech Cement (approximately 40 percent of new addition), the domestic brokerage firm said.

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“Top five players (UltraTech, Shree, ACC, Ambuja and Dalmia) are expected to accelerate at a faster pace (around 9 percent CAGR) leading to higher consolidation, which would drive efficiency and discipline in the sector,” it said.

However, the overall investor sentiment was weak, which resulted in selling across the globe. With this, shares of ACC, UltraTech Cement, Shree Cement, Dalmia Bharat, India Cements, Ambuja Cements and JK Cement also tanked 1-7 percent on the NSE.