Sectoral spotlight: Brokerages see potential in cement sector; pick stocks for long-term gains

Better demand prospects, led by a government thrust on infrastructure and housing sectors, augur well for the local cement industry. Domestic brokerage firms Motilal Oswal and Sharekhan remain positive on the sector and pick their top bets for the investors willing to make a move in this space.

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

Reiterating the view, Motilal Oswal said that a host of triggers would potentially drive the cement sector in India which include better demand prospects, led by infrastructure and housing sectors; increased consolidation in the industry and regulatory changes in the allotment of limestone blocks.

Cement stocks performance has been a mixed bag over the trailing three months where larger players like UltraTech, Shree Cement, The Ramco Cements and Dalmia Bharat outperformed their peers and the BSE Sensex, Sharekhan added.

Benign fuel prices will have a positive impact on the cement sector which should start reflecting in the April to June quarter of FY24, Motilal Oswal report opined. Imported (South African and Australian) coal price has dipped sharply in the past few months with a 34-54% decline from December 2022-exit and 28-33% QoQ drop in 4QFY23 QTD, the report said.

Performance Report Card
Pan-India average price is down 1% month-on-month in March 2023 and flat on the quarter-to-date basis in 4QFY23. The cement players attempted price hikes in February-March 2023 however, a significant portion of the hikes was reversed by offering discounts, incentives and price cuts. As a result, the all-India average cement price appears to be flat to marginally negative in 4Q v/s 3QFY23.

South India was the biggest laggard and dragged the average pan India prices for Q4FY2023, Sharekhan report revealed. Pan-India average cement prices were lower 0.8% q-o-q (up 0.9% y-o-y) on account of the weak pricing environment in the South where prices were down 5% q-o-q, the report said. It was followed by central India where the declines were 1% q-o-q. Other regions witnessed up to 1% q-o-q rise, this report noted.

Stocks to Buy
Motilal Oswal picks UltraTech Cement Limited as its top pick in the large cap space while Dalmia Bharat Limited and JK Cement Limited in the mid cap space.

Sharekhan bets on UltraTech, The Ramco Cements, Dalmia Bharat and Grasim Industries while reducing its rating on Shree Cement owing to unfavourable risk-reward led by high valuation. It recommends a ‘Hold’ on the JK Lakshmi Cement.

Key Risks
A weak macroeconomic environment and increased power, fuel, and freight costs would negatively affect profitability.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)