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HDFC securities picks Birla corp and Ultratech in midcaps and largecaps as top picks to invest and downgraded on Ambuja
The demand for cement has been growing at a fast pace in FY21, however, in the first quarter of FY22 the second wave of the Covid-19 pandemic swept across the country affecting demands in both urban and rural areas. In April and may sales were largely hit but as lockdown restrictions eased in India, there was a sharp recovery in June, the report from HDFC Securities added.
It also said utilisation fell to about 72% which was the second-lowest for the June quarter in the last couple of years, with June 20, the lowest ever. Industry volume is estimated to recover around 40% y-o-y.
Financial performance
HDFC Securities believes that cement major may report 46.60% year-on-year growth in net sales in the June quarter. On the other hand, it projected that adjusted profit after tax and EBITDA may increase by 43.70% and 34.80%, respectively, during the quarter.
For FY22/23 HDFC Securities has increased the profit estimates for south based companies (Dalmia, Orient and Deccan) owing to the robust pricing trend seen in Q1FY22. It has also marginally increased the estimates for JK Lakshmi and Ambuja factoring in healthy pricing in the east. It is estimated that Deccan cement, Ambuja and ACC would deliver less than 15% volume decline.
On the margin front, it is estimated that Ultratech, Ambuja, Shree, Ramco and Star Cement would deliver unitary EBITDA of Rs 1,200 per metric tonne.
Sector performance and recommendation
The brokerage estimates that cement demand is picking up from June onwards. Good demand and increased consolidation are helping the industry to pass on cost inflation. Fuel costs will continue to rise unabated with pet coke prices rising to a high of 85% yoy and diesel prices also increased by 28% yoy.
Owing to a sharp run-up in stock prices HDFC Securities has downgraded the ratings on Ambuja Cement, Dalmia and JK Cement from buy to add. On the other hand, UltraTech Cement and Birla Corporation are among the top picks in the largecap and midcap space, respectively.