Ronald Siyoni on Sharekhan’s top 5 picks among cement stocks

“Overall on YoY basis, a single digit growth in terms of volume has been seen till date but as monsoon recedes, the companies would expect this demand environment to move up and so they would be taking cement price hikes as we have usually seen in September in western and eastern regions,” says Ronald Siyoni, Research Analyst, Sharekhan

Is it fair to say that the worst is over for the cement sector? Now the tide has changed, perhaps there is quite a bit of upside available for some of these cement counters now?
Yes, it has been rightly pointed out that the cost inflation has been easing especially on the power and the fuel costs. We have seen the domestic petcoke producers’ declining prices during September also. Overall, for Q2 of FY23, the domestic petcoke prices are down by about 18% sequentially. Also, imported petcoke prices on US CFR basis in July-August are down 22% odd sequentially. So, there is definitely an 18% to 20% decline seen in imported petcoke prices on per tonne basis.

Also, there have been news reports suggesting that newer sources of imported coal – Russia and Venezuela – are available at much lower prices. The cost inflation, which in terms of pet coke, is expected to be at the peak for Q2 FY23 would start to reflect from Q3 onwards and we should see an improvement in operational EBITDA per tonne.

On the demand front, the monsoon has an impact on Q2 earnings and as per DPIT or cement transported through rail, we have seen 6% to 8% decline month on month during July-August months. But still, in July, it was up 5% for the railways and flattish for August. Overall on YoY basis, a single digit growth in terms of volume has been seen till date but as monsoon recedes, the companies would expect this demand environment to move up and so they would be taking cement price hikes as we have usually seen in September in western and eastern regions.

Overall, the demand outlook looks healthy from Q3 onwards in terms of petcoke. Diesel prices are down 5% sequentially, pet coke prices are down 18% to 22% odd sequentially. This should be reflecting in the numbers from Q3 onwards and possibly we can see upward revision in estimates for FY23 if the situation continues.

Do you expect further upgrades to come by for the sector? What kind of upside do you see on individual counters?
The key point is that global freight rates are easing, down by 40% to 60% on main routes since January currently and are expected to further go down. This has been putting downward pressure on imported fuel prices. Our top picks in the cement sector are UltraTech, Shree Cement, Dalmia Bharat, JK Lakshmi Cement and Shree Cement.

We would recommend these five picks to the investors and we had recently upgraded UltraTech’s price to Rs 7,700; for Shree Cement, we have a price target of Rs 24,000, as there is limited upside left due to the current rally.

JK Lakshmi has a very attractive valuation and has not seen a run up as compared to its peers while Dalmia Bharat has recovered from its lows. So these four-five stocks are the preferred picks in our coverage universe.