2 Large Cap Cement Sector Stocks To Buy For Potential Gains, Recommended By ICICI Securities

Cost pressures ease amid price hikes

Our channel checks suggest industry volumes are likely to report flat to low single-digit volume growth YoY (despite high base) during Aug'22 to ~29mnte, implying a relatively strong pan-India clinker utilisation at ~70% this monsoon. MoM volumes may be down 6-8%, in-line with seasonality. On the pricing front, average pan-India prices fell ~2% MoM in Aug'22 largely due to 4% MoM dip in East India. However, prices were hiked by Rs15-20/bag (up 4-4.5%MoM) in East and West India (in the non-trade segment) w.e.f. 6th Sep'22 with possibility of a further hike of Rs15/bag from mid-Sep'22 in East India. Spot international petcoke prices have slightly increased to US$196/te (CIF) in Sep'22 (up ~3% MoM), though it has corrected ~30% from peak in Apr'22. Similarly, domestic petcoke prices declined ~30% from its peak in Jun'22 to Rs 16,000/te in Sep'22. "Assuming fuel prices sustain at current levels (or correct further) coupled with price hikes / current price hike absorption, we expect risk-reward to turn favourable in the medium-term perspective as margins/consensus earnings downgrade has likely bottomed out. Ultratech Cement and Shree Cement remain our top picks. We also like JKCE and JKLC," the brokerage has said.

Ultratech Cement - Stock Outlook, Target price & Potential Gains

The current market price (CMP) of stock is Rs 6,818 apiece. The 52 week low of the stock is Rs 5,157.05 apiece and was recorded in June 2022 and the 52 week high is Rs 8,269 apiece and was recorded in November 2021, respectively.

The brokerage has estimated a target price of Rs 8500 apiece with a buy call. If we consider the brokerage's estimated target price, the stock could surge around 25% in 12 months.

Ultratech Cement - Returns

The stock of the company in the past 1 week, surged 4.77%. It has given 4.17% in the past 1 month and 23.99% in the past 3 months, respectively. Whereas, over the past 1 year, the stock gave a negative return of 13.94%. Over the past 3 years, the stock slid roughly 70.74%. It has given nearly 61.91% positive return over the past 5 years.

Shree Cement Stock Outlook, Target price & Potential Gains

The Current Market Price (CMP) of stock is Rs 24,178.20 apiece. The stock's 52 week low is Rs 17,865.20 apiece recorded in June 2022 and 52 week high is Rs 31,469.95 apiece recorded in September 2021, respectively.

The brokerage has given a target price of Rs 25,500 apiece with a buy call. Considering the estimated target price, the stock is likely to gain 6% in 12 months if purchased at the current market price.

Shree Cement - Returns

In the past 1 week, the stock gave a positive return of 13.77%. Whereas, in the past 1 and 3 months, it gave a positive return of 14.53% and 26.31%, respectively. Over the year, the stock has fallen nearly 21.02%, giving a neagtive return. However, in the past 3 and 5 years, the stock surged and gave 30.37% in 3 years and 27.9% in 5 years, respectively.

Industry volumes likely to report flat to low single-digit growth YoY

Industry volumes likely to report flat to low single-digit growth YoY despite the high base of Aug'21, which was up >35% YoY. On regional basis, volumes declined by high single-digit YoY in West and Central India due to heavy rainfall while East and South India are likely to report low to mid single-digit growth led by robust demand in the infrastructure segment. Volumes in North India were broadly flat YoY. Further, cumulative rainfall till date has been ~5% above normal, which we believe augurs well for IHB demand from H2FY22 onward.

Pan-India average prices corrected by ~2% MoM in Aug’22 as prices fell

The steepest fall being in North and East India by 3% and 4% respectively followed 1.5% dip in South India. However, prices were increased by Rs15-20/bag (up 4-4.5% MoM) in East and West India (in the non-trade segment) w.e.f. 6th Sep'22 with possibility of a further hike of Rs15/bag in mid-Sep'22 in East India. Checks in North and Central regions suggest likelihood of price hikes from the first week of Oct'22.

Fuel cost pressures ease; more sustained reduction required

Despite average international petcoke prices slightly inching up to US$196/te (CIF) in Sep'22-TD (up ~3% MoM), it has corrected ~30% from its peak in Apr'22 - and is now up only 10% YoY. Similarly, domestic petcoke prices are down by ~30% from peak (Jun'22) to Rs16,000/te. Further, spot Indonesian coal is now available at US$168/te, which is 13% lower from peak in Jun'22. Along with Russian coal (US$165/te CFR), Venezuelan petcoke is also available at US$128/te (CFR), which we believe may result in fuel cost/te declining by ~Rs300/te QoQ from Q3FY23 onward.

Industry average EBITDA/te could still decline in Q2FY23

Industry average EBITDA/te could still decline in Q2FY23, turn broadly flat in Q3FY23 and start to inch up from Q4FY23 - both on QoQ and YoY basis (assuming the spread between cement and fuel prices sustains or improves from current levels). While near-term stock price performance would hinge on the said spread, we believe risk-reward is favourable in the medium-term perspective as margins/consensus earnings downgrades have likely bottomed out. Although >100mnte capacities are announced to be added over the next 3-4 years, incremental demand, production discipline and receding cost pressures may allow the industry to revert to FY21 EBITDA/te by FY24E-FY25E, in our view.

Disclaimer

The stocks have been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.