Cement sector outlook positive; UltraTech, Dalmia Bharat among 4 stocks to ’Buy’, this one to ’hold’

Cement stocks performed as a mixed bag in the past three months where larger players such as UltraTech, Shree Cement, The Ramco Cements and Dalmia Bharat have outperformed its peers and Sensex, said domestic brokerage and research firm Sharekhan by BNP Paribas.

The brokerage remained positive on the sector continuing its selective preference for UltraTech Cement, The Ramco Cements, Dalmia Bharat and Grasim Industries.

However, the brokerage has a 'Reduce' rating on Shree Cement owing to unfavourable risk-reward led by high valuation and a 'Hold' call on JK Lakshmi Cement.

Demand environment remain healthy with lower P&F cost tailwinds

The cement industry is expected to continue to ride on healthy demand environment over near to medium term aided by expedited pre-election government spend, continued focus of government on infrastructure development and sustained demand from residential housing segment.

The brokerage expects healthy demand environment to absorb upcoming capacity additions with capacity utilisation broadly remaining flattish. Further, the decline in international and domestic pet coke/coal prices since Q3FY2023 is expected to add to operational profitability in terms of EBITDA/tonne during Q4FY2023 and Q1FY2024 provided cement prices remain in stable to positive territory.

It also expects cement demand to grow in mid-single digit during Q4FY2023 driven by non-trade segment as government spending on infrastructure and IHB housing demand is expected to remain strong.

“Overall, the cement industry’s outlook remains positive led by healthy demand and expected improvement in operational profitability owing to expected decline in power and fuel costs provided the industry does not pass on the benefit of lower costs to gain volume share,” the note stated.

"Our channel checks reveal that pan-India cement prices fall m-o-m in March 2023 led by weak pricing environment in South India. Pan-India average cement prices declined by 1.5% m-o-m (down 3.1% y-o-y) in March 2023 with Southern region witnessing decline of 3% m-o-m while other regions upto 1.5% m-o-m," it said.

The brokerage believes that the closure of fiscal year-end would have led to higher volume push and weaker pricing environment during March 2023.

Key risks, as per the brokerage, include a weak macroeconomic environment and an increased power, fuel, and freight costs would negatively affect profitability.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.