Centrum Broking in its latest thematic note said the risk-reward has turned unfavourable for cement shares, as most stocks are currently trading close to its target price and above the average EV/Ebitda bands, adequately factoring in growth potential for the next two years. The domestic brokerage said it sees FY25 as a tough year for cement makers given the post-election slowdown and new capacities bunching up.
While the brokerage has not changed its price estimates for its coverage stocks, it has downgraded its recommendations on four cement shares, following the recent surge in stock prices. Operating costs have started inching up, it said adding that the demand momentum is likely to halt going ahead.
The brokerage has three 'buys', two 'Add', four 'Reduce' and three 'Sell' ratings within the cement sector. "We have downgraded Heidelberg Cement, JK Lakshmi Cement Ltd, Sagar Cements and Ultratech Cement by one notch. We advise playing the sector through sector leader like UltraTech Cement and also through Birla Corp and Nuvoco Vistas Corporation, which are a combination of deleveraging, growth and rerating stories," it said.
Centrum said the demand momentum post Covid has been relatively strong in the country with consecutive three years of good growth starting from FY22. However, it believes that the demand momentum is likely to halt given the expected slowdown in construction activities in 4QFY24, before elections due to code of conduct. Besides, deficient rains is likely to impact rural demand negatively. Rainfall from South West monsoon this year is 10 per cent below its long period average till 1st week of September.
"We also expect some portions of the governments capex to be diverted to relief package or welfare schemes for farmers in case of continuation of deficient rains this year. We are currently building in 5 per cent YoY growth in cement demand in FY25," it said.
Over the past 3 months, imported coal prices have increased by 15 per cent and petcoke prices have increased by 28 per cent. Even though, both coal and petcoke prices are still lower on YoY basis, the operating costs for the sector are likely to rise from 4QFY24 onwards, Centrum said.
"As a result, during FY25, we not only expect demand growth to be weak but also expect costs to inch up, putting pressure on both growth and margins," Centrum said.
Given the better demand momentum in recent years and improved cash flows of the sector, ambitions to garner more market share has increased. As a result, many companies have announced grandiose plans for capacity addition, which Centum believes will result in addition of 310-340 million tonnes of capacity over next 6 years. "We are building in incremental supply of 130mn mt against incremental demand of 86 million tonnes over FY23-26E," it said.
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