Cement shares in focus; JK Lakshmi, Dalmia, JK Cement up over 12% in 1 mth

Analysts expect cement stocks to witness catch up activity after months of underperformance as many negatives seem to be priced-in

Shares of cement companies continued at their upward movement on the bourses on expectation of margin improvement due to falling input costs, and demand recovery post monsoon and during the next fiscal (FY24) due to pre-general election government spending.

On Thursday, Dalmia Bharat, Birla Corporation, JK Cement, India Cement, JK Lakshmi Cement, Ambuja Cements, Ramco Cement, and UltraTech Cement gained in the range of 1 per cent to 5 per cent. In comparison, the S&P BSE Sensex was up 0.42 per cent at 63,362 at 10:49 AM.

Given the government's focus on infrastructure spending and affordable housing, the cement sector's long-term growth potential continues to remain healthy. Demand revival is imminent, especially during the festive season, and the January-March peak construction period, sector giant UltraTech Cement had said post its Q2 results announcement.

In the past one month, the stock prices of JK Lakshmi Cement, and Sanghi Industries have rallied 25 per cent and 22 per cent, respectively. While those of Dalmia Bharat, JK Cement, and Sagar Cements surged in the range of 10 per cent to 19 per cent.

Ambuja Cements, ACC, UltraTech Cement and Shree Cement have seen their market price increase between 5 per cent and 7 per cent. In comparison, the S&P BSE Sensex was up 4 per cent during the period.

According to the management of Ambuja Cements, the cement industry has been facing significant margin pressure due to steep rise in global energy prices. However, recent cooling off in energy prices, and post monsoon demand pick up appears like silver lining for coming quarters.

According to analysts operating costs are expected to decline in the coming quarters, after peaking in Q2FY23, with international petcoke prices down around 30 per cent from the peak, at $195/ton. The dip in fuel prices is expected to provide cost savings of at least Rs 150-200/ton from Q3, analysts at Emkay Global Financial Services said in a cement sector update.

Although the margin profile and profitability for Q2 has remained at a multi quarter low, we expect margins to recover from Q3 onwards on softening in international fuel prices, pick-up in construction activities (post monsoon). Overall, we expect a cost reduction of Rs 250-300/tonne over the next two quarters, said those at ICICI Securities in Q2 earnings wrap report.

According to the brokerage firm, the Nifty Infra index is on the cusp of breaking above last one year range and witness a faster retracement of the last nine month's decline in just five months, indicating a structural turnaround. Within the infra space, we expect cement stocks to witness catch up activity after multi-month underperformance as many negatives now look priced in. Further sharp decline in crude oil prices and other commodities would work as tailwinds for the sector, it added.