Brokerage house CLSA downgraded shares of key Indian cement makers on Tuesday because of a muted outlook on price realizations. It has trimmed earnings estimates of large-cap companies under its coverage by around 3-15% for fiscal years 2020 and 2021.

Cement stocks responded to it with a yawn. Shares of large-cap firms such as ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd ended the day’s session largely flat.

Cement prices have remained weak from the past many quarters now. That the much-awaited recovery in pricing has been delayed is not new. Still, these stocks don’t seem too perturbed.

According to analysts, cement makers have been beneficiaries of the general move towards large-cap stocks in the past year. Since mid-caps were badly battered last year, domestic fund managers flocked to park their money in large-cap stocks, in the so-called chase for quality. This has kept the momentum in these stocks going, despite dismal earnings.

The market capitalization of 15 cement makers has risen by around 32% in the past three calendar years, showed an analysis by Mint. This is despite pressure on pricing and earnings. While prices have corrected from their highs a year ago, the fall isn’t commensurate with shortfall in performance, say analysts.

Cement stocks have traded at high valuations in the past three years on expectation of a revival in demand growth and low capacity additions. The revival in demand growth did not materialise, and owing to announcements for increasing capacity addition, expectations of an upcycle have substantially waned," IIFL Institutional Equities said in a report last June. IIFL downgraded its outlook on the sector to negative after remaining positive/neutral for almost seven years.

MNC brokers such as CLSA and Morgan Stanley seem to be catching up with the view, although it remains to be seen when investors also take note.

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Morgan Stanley recently downgraded its view on the industry to an “in-line" rating. “Profitability of Indian cement companies should recover from the recent lows, but the pace will be slower than expected," it said in a report on 19 December.

Cement companies have grappled with a variety of challenges, such as subdued demand growth due to the lull in real estate sales, the sand mining ban in some parts of the country and surging input cost pressure.

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While input cost inflation is easing and the sand mining issue is out of the way, demand growth is mainly driven by government spending on infrastructure projects. And this has been inadequate to match the ongoing spate of massive capacity additions. As a result, the capacity utilization levels of the industry remain below 70%. All of this is weighing on prices.

Speaking of valuations, large-cap cement stocks are trading at a one-year forward EV/Ebitda of around 11-22 times. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization.

Now that the MNC brokers have joined the chorus of downgrades, perhaps the strength of some cement stocks may get tested.