Cement could be a big beneficiary of Budget

Govt's emphasis on roads, smart cities, rural India to boost demand

Cement stocks saw some underperformance in the recent past due to soft realisation, and demand in most regions, barring south India and subdued December quarter earnings. However, analysts see gains ahead. The increased emphasis on infrastructure is the reason.

With the Budget around the corner, the government is expected to increase allocation to roads, smart city projects, rural India and housing,  boosting demand. However, any benefits will start flowing only from the second half of FY17, as the first half will be taken up by allocation and project awarding, and includes three months of monsoon. Nevertheless, the sector is one investment area  investors should not miss, say most experts.

UltraTech Cement remains the top pick of analysts. It is benefiting from volume growth in times of soft demand. And, it will be the biggest beneficiary of revival in demand. The company has managed cost controls well and reported an earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne of close to Rs 900, one of the highest among peers in the December quarter.

Holcim group companies ACC and Ambuja Cements, however, lagged in terms of expansion. While ACC could benefit from its new capacity in east India, it continues to disappoint on profitability. With blended Ebitda per tonne of Rs 460, this was only half of UltraTech’s. Ambuja’s Ebitda per tonne of Rs 555 isn’t very far from ACC’s.

Among regional players, Shree Cement remains one of the top picks even as valuations are expensive, partly justified given its sales strengths and cost controls. The company has expanded its capacities in east India. JK Lakshmi has also expanded in east India and should benefit from the move.

Likewise, south India-based companies like Ramco Cements and Dalmia Bharat have reported impressive Ebitda per tonne of Rs 1,506 and Rs 1,175, respectively. India Cements with higher exposure to Andhra and Telangana however continues to witness relatively lower profitability (Ebitda per tonne of Rs 748 in Q3). Among smaller companies, JK Cement and JK Lakshmi are trading at attractive valuations (replacement cost of $70-80/tonne on FY17 capacities) and could also be considered.

With demand estimated to grow six-seven per cent in FY17 and capacity additions at two per cent, it should help utilisation levels inch up and benefit the industry, which is already seeing consolidation.