Nuvama says 'Buy' ACC, Ambuja, JK Cement as sector sentiment improves

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Nuvama on cement sector: The December quarter of FY25 (Q3FY25) for the cement sector presented a mixed bag of results, with industry volumes showing mid-single-digit year-on-year (Y-o-Y) growth, while prices remained largely stable quarter-on-quarter (Q-o-Q), analysts at Nuvama said, in a note.

 

Ebitda per tonne improved approximately 15 per cent Q-o-Q to Rs 743 (across 15 major companies), driven by easing fuel costs and lower other expenses from operational efficiencies.

 

Looking ahead, analysts said that Q4FY25 is expected to show better volume growth than the first nine months, supported by increased government infrastructure spending, pent-up demand, and a boost in real estate launches. 

 

The softening of fuel prices (with a lag effect) and cost efficiency measures implemented by companies, analysts believe, will help mitigate the adverse effects of weak Y-o-Y realisations (due to heightened competitive intensity).

 

“We remain neutral on the space and recommend ‘Buy’ on JK Cement, Ambuja Cements and ACC and ‘Hold’ on UltraTech Cement and Shree Cement,” said Parvez Qazi and Shrey Mehta of Nuvama, in a note.

 

As of 12:00 noon, most of the aforementioned stocks were trading in the negative territory. JK Cement was down 1.81 per cent at Rs 4,548.45, Ambuja Cements fell 1.47 per cent to Rs 481.60, and ACC dropped 3.56 per cent to Rs 1,843. UltraTech Cement was down 1.22 per cent at Rs 11,342. However, Shree Cement bucked the trend, trading 0.08 per cent higher at Rs 28,331.70.

 

What are key drivers behind this outlook?

 

Gradual demand improvement

 

The Q3FY25 indicated early signs of demand recovery, with 15 major cement companies reporting approximately 8 per cent Y-o-Y (up ~10 per cent Q-o-Q) volume growth, said analysts at Nuvama. Ambuja, Nuvoco, UltraTech, and Star Cements led the volume growth in the quarter, all showing over 10 per cent Y-o-Y growth. 

 

The easing of fuel prices (down 5 per cent Q-o-Q/14 per cent Y-o-Y) and reductions in other expenses (down 5 per cent Q-o-Q/1 per cent Y-o-Y) counterbalanced the impact of muted realisations (flat Q-o-Q/down ~9 per cent Y-o-Y) and rising raw material costs/t (up 4 per cent Q-o-Q/~11 per cent Y-o-Y), leading to improved sequential profitability. 

 

Given this, analysts anticipate that operating leverage will support this improvement in Q4FY25, and the ongoing softening of fuel costs will offer further relief on the cost side.

 

Stable pricing

 

Nuvama analysts also noted that the realisations remained mostly flat Q-o-Q (down ~9 per cent Y-o-Y). According to channel checks and management commentary during conference calls, prices slightly increased in January/February 2025 compared to the Q3FY25 average and are expected to remain stable moving forward. 

 

With industry focus shifting to volume growth in the closing quarter of the year, the likelihood of substantial price hikes in the near-term remains low due to the continued high competitive pressure. 

 

Overall, with prices nearing their bottom and volume growth picking up (after a subdued H1FY25), analysts believe, sector sentiment for the near-term is showing improvement.