Cement shares zoom up to 5%; UltraTech joins Rs 3 trillion market cap-club

Nomura estimates margins to expand on stronger volume growth, pricing discipline and relatively lower fuel cost

Shares of cement makers were in high demand on Wednesday after expectations of a healthy operational performance and foreign brokerage Nomura upgrading its view on the sector.

Among individual stocks, sector leader UltraTech Cement jumped 5 per cent to hit a record high of Rs 10,489 on the BSE in intra-day trade.

The stock finally ended 4.2 per cent higher at Rs 10,445. Nuvoco Vistas Corp, Dalmia Bharat, Ramco Cements, Ambuja Cements and ACC were among other cement stocks that saw gains between 2 per cent and 4.5 per cent on Wednesday, versus 1 per cent rise in the leading indices.

With Wednesday’s rally, UltraTech’s stock also joined the elite group of companies with a market capitalisation (mcap) of Rs 3 trillion or more.

With Rs 3.02 trillion mcap, UltraTech Cement stood at the 20th position in the overall ranking, according to BSE data, moving ahead of Sun Pharmaceutical Industries.

In the past month, the stock rallied 23 per cent as compared to an 8 per cent rise in the S&P BSE Sensex. It is up 50 per cent in 2023 versus an 18-19 per cent rise in Sensex and Nifty.

According to UltraTech’s management, the demand revival is imminent, especially during the festive season and the January-March peak construction period.

Demand will also be led by pre-election spending, continued government push on infrastructure development, and sustained real estate development.

This augurs well for the company, the management said, while announcing September quarter (Q2FY24) results in October.

Across all markets, infrastructure development activities have lifted demand.

The government's dedication towards infrastructure development, persistent demand for housing amid rapid urbanisation and rising housing loan penetration are expected to boost cement demand, according to analysts.

Nomura believes the momentum in cement stocks is likely to continue with margins expanding on the back of stronger volume growth, pricing discipline and relatively lower fuel costs.

FY24 has been a year of strong volume growth and fuel cost moderation. Average FY24 year-to-date (YTD) pet coke and thermal coal prices are down 35 per cent and 45 per cent year-on-year (Y-o-Y), respectively.

Despite the recent uptick, spot prices are significantly below the highs of FY23. Based on 90 days lagged fuel cost, cement spreads are so far up Rs 300 per tonne in Q3FY24.

Based on its analysis, Nomura expects an average Rs 200- 250 per tonne unitary EBITDA improvement in Q3FY24. Even if the fuel cost escalates from these levels, the full impact will come from Q2FY25, it said.

Upgrading its view on India’s cement industry on account of potential stronger sales volume growth (CAGR of 5 per cent over FY24-26, likely to be better than 4 per cent in the past decade), better pricing discipline, and rolling forward valuations to FY26, Nomura has upgraded UltraTech, Dalmia Bharat and Ramco to 'buy' from 'neutral', while maintaining 'buy' on Shree Cement.

Cement demand, after witnessing high double-digit growth in October 2023, moderated in November mainly due to the festive season, labour unavailability, state elections and pollution control curbs in a few markets.

However, Motilal Oswal Financial Services (MOFSL) anticipates a rebound in December 2023, led by a strong project pipeline in key sectors such as infrastructure, real estate, and private capex.

Further, the operating profit margin or OPM should improve in the second half (October to March) of 2023-24 (H2FY24), backed by price hikes and cost benefits.

Underlying cement demand remains healthy, as volume offtake has likely increased 11-12 per cent Y-o-Y in the April-November period.

Emkay Global expects steady demand growth (7-8 per cent CAGR) due to continued boost in government spending on infra projects, gradual price increases along with ongoing cost optimisation and de-risking efforts over the next few years.

The industry is likely to witness a reduction in overall cost per tonne (both variable and fixed) in H2FY24.

With the full benefits of lower fuel costs and recent price hikes likely to reflect in H2FY24 coupled with better operating leverage, Antique Stock Broking expects a sharp expansion in the profitability of both Q-o-Q and Y-o-Y from H2FY24.