Cement makers see raise in target prices, upgrades as Morgan predicts demand boom

Expecting continued margin improvement in the next few years, they anticipate a positive industry re-rating, foreseeing continued stock outperformance over the next 12 months

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Morgan Stanley has raised the target prices and maintained the ‘overweight’ rating for a host of cement firms. Expecting continued margin improvement in the next few years, the brokerage anticipates a positive industry re-rating with continued outperformance by the stock for the next 12 months.

The brokerage firm retained the ‘overweight’ tag on UltraTech Cement, Dalmia Bharat, and Grasim Industries, while Shree Cement stayed in the ‘equal weight’ group. Ambuja Cement and ACC were upgraded to ‘overweight’ and ‘equal weight’.

Morgan has raised the target prices of all these cement makers. For UltraTech, the target has been raised to Rs 12,000 from Rs 9,300, for Dalmia Bharat, it is Rs 2,750 from Rs 2,360, for Ambuja Cement, it is Rs 600, up from Rs 390, for Grasim Industries, it is Rs 2,430 from Rs 1,977, for Shree Cement, it is Rs 28,500 from Rs 25,000 and, for ACC, the target price is now Rs 2,400, up from Rs 1,650.

While upgrading ACC and Ambuja Cement, Morgan cited a high starting point of utilisation rates that will limit volumes for both in the next couple of years. Despite this, with increased visibility on organic capacity expansion plans and a robust industry demand cycle expected to persist, Morgan believes the risk of volume market share losses for Ambuja Cement and ACC is now lower in the medium-to-long term. Additionally, synergy benefits from group companies are contributing to significant improvements in profitability, leading to the upgrade of both Ambuja Cement and ACC by a notch, it added.

Cement demand has been robust, showing low double-digit growth in recent years. Morgan Stanley sees the industry on a multi-year demand upcycle and predicts sustained growth at a faster pace than the GDP. It expects a 7 percent CAGR in industry demand from 2024 to 2026, driven by infrastructure, with additional support from housing and industrial/ commercial segments.

The industry expanded capacity in recent years without disrupting demand-supply dynamics and utilisation rates have grown rapidly in the past three years. Despite a strong capacity addition pipeline, Morgan remains optimistic about industry utilisation rates staying strong and stable. Last year, the cement makers recorded significant margin expansion on the back of high demand and fuel cost deflation. As fuel costs normalise, Morgan expects sustained demand and increased utilisation to support the cement prices, leading to the next phase of margin expansion. They believe the risk of lower realisation is low in this cycle, thanks to industry consolidation and new capacity additions being concentrated among large players, minimising the risk of irrational pricing, it said.

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