Foreign brokerage CLSA on Thursday said cement sector profitability will be at a multi-quarter low for its coverage universe in September quarter, but a recovery in margin is likely in December quarter. A demand recovery post festive season (end-October) would be key to watch for, it said adding that eyes would also be on a likely ramp-up of infrastructure projects and support for rural spend, as next year is being the year prior to general elections.
Given a well-laid out organic growth roadmap and relatively cheaper valuations, it prefers UltraTech Cement over Ambuja Cements.
CLSA highlighted that spot petcoke prices peaked in the June quarter and have dropped 30 per cent since then. Given inventory and time lag, it expects fuel costs to rise in September quarter and then correct, it said.
CLSA believes cement demand increased by high-single digits YoY in September quarter on a base of 6 per cent growth in the year-ago quarter. This implies a three-year CAGR of 6-8 per cent, it said.
In the ongoing quarter, CLSA’s channel checks suggest that cement prices are down 3-6 per cent quarter-on-quarter (QoQ) across regions, which is slightly higher than normal seasonality. Price declines have been greater in North and Central India compared to other regions, it said, adding that there has been some attempt to raise prices in November.
“We expect margins to recover in Q3FY23 on lower fuel prices and benefits of operating leverage. Demand has been quite resilient, growing by high single digit YoY, while prices have fallen by 3-6 per cent QoQ. The demand outlook and price increase post festive season (end-October) would be key to watch for,” it said.
CLSA has an outperform rating on UltraTech Cement with a target of Rs 7,200. This is, though less than its target of Rs 7,365 on the stock in June this year. On Thursday, shares of UltraTech Cement were trading at Rs 6,282.70. The Rs 7,200-price target suggests a 14.60 per cent potential upside on
The brokerage has a ‘sell’ rating on Ambuja Cements with a target of Rs 470. This stock traded at Rs 510.80 a piece in Thursday’s trade.
For September quarter, CLSA expects Ebitda per tonne for its coverage to be at a multi-quarter low, down 30 per cent QoQ to Rs 700 per tonne on lower prices and higher costs.
“We expect cash costs to rise 3-4 per cent QoQ (up 17 per cent YoY) on higher power and fuel costs and also negative operating leverage,” it said.
CLSA said cement sector is in the midst of a demand upcycle, but utilisations are likely to be lower for longer, given high-capacity expansions. Increased industry consolidation will not be enough to offset the ongoing wave of capacity expansion and is likely to lead to softer margins and expensive inorganic expansion among tier 1 players, over the medium term, it said.