The brokerage firm ICICI Securities has placed an eye on the stocks from the cement sector and has picked up ACC, Ambuja Cement, UltraTech Cement, JK Lakshmi Cement, Ramco Cement and Sagar Cement with a buy rating and Shree Cement, Heidelberg Cement, JK Cement, Birla Corp with a hold rating. The brokerage has said that "After passing through challenges like unseasonal rains, labour shortages during Q3, cement demand witnessed a gradual improvement in Q4FY22E with March witnessing a strong rebound in terms of sales volume as per dealer's feedback. However, given the high base of last year that saw 24% YoY jump in volumes, sales volume for Q4FY22E is likely to remain flat YoY while it may improve 16.3% QoQ to ~61.3MT for our coverage universe. For full year FY22E, we expect the industry to end the year with sales volume growth of 9% while cost inflation remains a key near-term concern for the sector."
"Petcoke, coal and diesel prices has seen unprecedented rise since February 2022. Q4FY22 average prices of international coal are up 14% vs. Q3 average (refer charts) while current rates of coal/petcoke are up another 23% and 25% QoQ, respectively. As the industry normally operates with two to three months of fuel inventories, the sector would witness marginal impact of fuel cost inflation in Q4FY22E. Taking this into account, we expect our I-direct universe EBITDA margins to decline ~35 bps QoQ to 16.7%," added the brokerage.
"To mitigate the full impact of cost inflation from Q1FY23E, players have again taken price hikes in the range of Rs 20-40/bag across all regions from April 2022 onwards. Overall, for Q4FY22E, our Idirect cement coverage universe is expected to report flat QoQ EBITDA/t while it will be sharply lower by 26% YoY. Region wise, performance of north and south based companies is expected to remain relatively better while east and west region are expected to report a moderate performance," said ICICI Securities in note.
The brokerage has claimed that "Although cement prices were hiked by Rs 15-17/bag from January 2022 end to combat rising input costs, the same is lagging the cost inflation curve. Overall, we expect cement prices to remain higher at 7.9% YoY and 2.1% QoQ. South & west regions are expected to witness price hikes of over 9% YoY due to low base effect. On a QoQ basis, eastern region is expected to witness a price hike of 5.6% vs. average hike of 2.1% for the industry."
"While international coal prices increased 14% QoQ, petcoke prices declined 11% QoQ. Average diesel costs are also lower 3% QoQ due to excise cuts. With average cement price increase of 2.1%, we expect EBITDA/t to stay flat QoQ at Rs 943/t. However, YoY we expect EBITDA/tonne to decline ~26% due to sharp escalations in the fuel and freight costs," said ICICI Securities.
|Company||Rating||Target Price in Rs|
|JK Lakshmi Cem||BUY||580|
|Source: ICICI Direct Research. Data as of April 7, 2022|