Cement companies ready for more gains
Strong demand and improving utilisations to boost growth
With the share price of UltraTech and Shree Cement seeing new highs in September and ACC and Ambuja Cements trading near their highs, the Street’s confidence in the sector is evident. Even mid-cap players such as JK Lakshmi, Orient Cement and Ramco Cements have scaled fresh highs in the past one week. The optimism stems from expectations of improvement in demand and realisations as the monsoon season comes to an end. Analysts say utilisation levels have bottomed out and demand is set to grow not only in the second half, but in the years to come. The capacity additions have also slowed and thereby analysts see the longest-ever up-cycle ahead for the sector.
Cement demand, muted in FY16, saw some uptick in the March ’16 quarter. Realisations improved, boosting profitability of cement majors. The June quarter saw further improvement as benign input prices pushed up profitability further. As the lean monsoon season comes to an end, barring Thursday’s exceptional fall, stock prices have generally been rising on hopes of improvement in demand and realisations. Thus, the rally in share prices of panIndia players, that caught pace from the fourth quarter of FY16, has now strengthened. Binod Modi at Reliance Securities says though the demand scenario remained weak in most parts of FY16, a sharp uptick in demand was witnessed (nine per cent year-on-year) in the March quarter, mainly triggered by healthy acceleration in the project segment sales before seeing some moderations. Modi expects demand to accelerate in the second half of FY17 on strong project segment sales and rural demand uptick and anticipates a compounded annual growth (CAGR) of 7.5 per cent during FY16-20.
Analysts at Morgan Stanley also see demand growing 7.4 per cent CAGR during FY16-21. They say with new capacity additions taking four-five years as against two-three years previously, the medium-term risk of negative surprises of capacity additions is also low. The FY10-16 period had seen 196 million tonnes (mt) of capacities being added but new announcements have been muted (10 mt or 2.5 per cent of the existing capacity) in the past 18 months, say analysts. With slow capacity additions and demand expected to pick up, utilisation levels should improve. With all this, Morgan Stanley projects a 31 per cent CAGR in Ebitda (operating profit) over FY16-19 for their coverage universe of cement companies. Among top picks of analysts, UltraTech figures in the large-cap list, whereas analysts expect Ramco Cements, JK Cement, JK Lakshmi Cement, Sagar Cements, Orient Cement and Mangalam Cement, etc. in the mid-cap space to benefit.