Top Stock Picks: ICICI Securities Recommends These Cement Stocks To Watch Now Amid Price Hikes

The cement sector has caught the attention of domestic brokerage company ICICI Securities, which has chosen UltraTech Cement (target price Rs 9,080) and Shree Cement (target price Rs 29,700) as its top recommendations to buy.

Considering the cement sector, the brokerage has said "Industry may see low double-digit YoY volume growth / usual ~15% MoM fall to an estimated 32-33mnte in Apr'22E implying pan-India utilisation of 82-83%. This would be despite sharp price hikes averaging Rs25-30/bag MoM. South and West, on a low base, may post >20% YoY volume growth while other regions may see growth in low single digits. If we assume the current volume trend sustains in May'22, industry may post 25-30% YoY volume growth during the month on a low base impacted by second covid wave. Accordingly, industry may post ~15% YoY volume growth in Q1FY23E implying a 3-year CAGR of 4%."

ICICI Securities has said "Imported coal prices and domestic petcoke prices are up ~50% (>Rs400/te impact) over the past two months owing to unfavourable geopolitical scenario, while retail diesel prices have risen 10% since mid-Mar'22. Accordingly, we expect variable costs to remain elevated in H1FY23E. While prices have been hiked to mitigate these cost escalations, investors would seek more comfort as and when these costs correct to more 'normalised' levels, in our view."

"Current exit-Apr'22 prices in the North / Central regions are up 14% YoY while the same are up 10% YoY in West / East regions. South prices are broadly flat YoY given erstwhile absolute high prices. On a MoM basis, most regions ex-South have seen price hikes of Rs20-40/bag even after factoring roll-back of Rs10-15/bag. We believe companies would be able to pass on cost escalations QoQ even in Q1FY23E and that EBITDA/te is unlikely to fall QoQ (although it may continue to fall on YoY basis). With expected volume growth of 15% YoY in Q1FY23E, absolute YoY EBITDA fall may be restricted to low double digits and the same may not disappoint street, in our view," the brokerage has claimed.

ICICI Securities has further highlighted that "Our channel checks suggest the demand recovery witnessed in Mar'22 is sustaining in Apr'22 as well and the industry may see low double-digit YoY volume growth this month despite sharp price hikes averaging Rs25-30/bag MoM. While average pan-India utilisation was estimated at 85% in first two weeks of Apr'22, the same may have dropped marginally to 80% post a sharp Rs50/bag price hike exSouth getting effective by mid-Apr'22. Accordingly, dealers indicate Rs10-15/bag price has been rolled back across a few regions, which would be attempted again by the companies in the coming weeks. Assuming these price hikes sustain till Jun'22, we believe companies would be able to pass on cost escalations QoQ even in Q1FY23E, and that EBITDA/te is unlikely to fall QoQ (though it may continue to fall YoY). UTCEM and SRCM remain our top picks. We also like JKCE and TRCL."

For the cement stocks, lower demand/prices, and higher cost escalations remain the key risks as per the brokerage.