Cement stocks: A look at Elara Capital’s top recommendations

• Follow

Led by higher government spending and strong rural demand, the cement sector is set to post strong double-digit volume growth in the March quarter. Improvement in prices in non-trade, benefits of operating leverage and partial access to low-cost fuel inventory are likely to ensure higher profitability for the sector in Q4FY21.

Companies like Dalmia Bharat, JK Cement, Udaipur Cement Works, Sagar Cement, Orient Cement, Saurashtra Cement, Ambuja Cement and UltraTech Cement have already gained more than 100% since March 25 last year.

There are hopes that cement price may rise going ahead due to a lower supply of coal. Elara Capital in its report said, “While input cost has continued to increase since Q1FY21 the fuel price risk for the industry has increased further in the past few months. While extreme Winter weather in Texas in February has affected pet coke supply, supply of coal slowed from South Africa as tropical storm Eloise had hit rail lines.”

It further added that the resumption of services has been slower than expected, resulting in lower stocks at Richard Bay Coal Terminal. Recently, Newcastle, the world’s biggest coal export port, has been affected by heavy rainfall, which hit the East Coast of Australia, causing the worst flooding in half a century. “We believe further price hikes may be needed to sustain margin,” Elara said.

As per market intermediaries of South India, Maharashtra, Delhi, Rajasthan, Bihar, Madhya Pradesh, Uttar Pradesh and West Bengal, cement firms may attempt a price hike in the range of Rs 10-30 per bag in April.

Latest checks further revealed that cement firms attempted price hikes of Rs 5-35 per bag across pockets in early March, and, prices over the month have been stable in most markets despite year-end pressure. Consequently, the all-India average retail price has surged by Rs 16 per 50 kg bag MoM to Rs 363, the second-best in FY21 after April 2020’s increase of Rs 27 per bag.

Commenting on the outlook, Elara said, “Strong demand from the hinterland, led by minimal Covid-19 cases and government’s strong impetus on infra and housing spending, had a salutary effect on industry’s demand revival in FY21. As per market intermediaries, the industry is expected to report robust volume growth in Q4FY21, driven by strong demand and low base of last year.”

The brokerage house has ‘Buy’ call on Birla Corporation (Target price: Rs 878), JK Lakshmi Cement (Rs 423), Prism Johnson (Rs 114) and Star Cement (Rs 118). On the other hand, it has ‘Accumulate’ call on ACC (Target price: Rs 1,885), Ambuja Cements (Rs 303), Heidelberg Cement (Rs 244), JK Cement (Rs 2,396), Orient Cement (Rs 91) and Shree Cement (Rs 25,747).