Financial results for the fourth quarter ended March 2019 (Q4FY19) have been a mixed bag with some companies across the sectors disappointing Street with their below-than-expected numbers as well as cautious guidance.
Cement companies, however, have been outliers. Notable names in the space such as Ultratech Cement, Ambuja Cements, Orient Cement, Star Cement, and Prism Johnson have delivered robust performance during the recently-concluded quarter, thanks to healthy demand and the recent hike in prices.
So, is the sector a good bet from the investment point of view?
A slew of tailwinds such as government's focus on infrastructure, implementation of ‘Housing for All’, rising rural income and rising aspirations for pucca houses in rural India are likely to boost demand for cement, analysts say. Moreover, improved capacity utilisation is likely to support the price, which has seen an uptick since March 2019. Average cement prices across the country rose by Rs 45/bag in March.
Financial service firm Trust Capital says that although capacities are in excess of current demand, incremental greenfield addition has become less lucrative given poor return ratios, tighter regulations and the rising cost of resources. The gap is expected to narrow over the next three-five years as demand catches up with supply.
The pace of setting up of capacities is expected to be lower than incremental demand. A revival of pricing power is seen in recent quarters, as demand remains firm and is expected to gain traction that will lead to higher capacity utilisation, industry consolidation.
ICRA, in its recent report, said it expected demand growth of 8 per cent in FY20. Given the limited capacity addition, this is likely to result in an improvement in the industry’s utilisation rate to 71 per cent in FY20 from 65 per cent in FY18.
At the bourses, however, cement stocks have underperformed. The demonetisation move crippled the sector as it created huge negative impact on both urban and rural housing post November 2016 for almost a year, analysts say.
"Liquidity crunch was spread to other spheres of business as money was stuck in real estate as investors could not liquidate the properties. The transactions in real estate/ land had almost frozen and investors’ community clearly started avoiding realty as an investment option," says report by Trust Capital.
Most analysts tracking the sector are bullish on Ultratech Cement, Ambuja Cements, Orient Cement, Star Cement, and Prism Johnson.
Ultratech Cement: Maintaining 'buy' rating on the stock with the target price of Rs 5,140, HDFC Securities in its results review said strong demand and pricing outlook along with rising cost efficiencies and lower energy costs should boost profits in subsequent quarters for the company. "We estimate Ultratech Cement consolidated EBITDA (earnings before interest, tax, depreciation and amortisation) / PAT (profit after tax) to grow at 26 per cent / 38 per cent CAGR (compound annual growth rate) during FY19-21E, driven by its cost leadership, pricing and cost tailwinds," it said. However, delays in Century Textiles' cement business acquisition, roll back in cement prices, and a surge in energy costs (crude led) are key risks.
Motilal Oswal Financial Services, too, has a 'buy' call on the stock with the price target of Rs 5,190. It has raised FY20 EBITDA estimate by 2.5 per cent (due to lower costs) and PAT estimate by 6.6 per cent (due to lower depreciation). It has also raised FY21 EBITDA estimate by 6 per cent and PAT estimate by 12.4 per cent.
ACC: Analysts at Prabhudas Lilladher note that cement prices continue to remain firm in ACC’s key markets of Central Uttar Pradesh (UP), Madhya Pradesh (MP), Jharkhand, Odisha, etc thereby fetching higher realisations. "Given the attractive valuations and improved quality of operations, we maintain BUY with a target price of Rs 1,735, EV/EBITDA of 13x CY20E," they said.
Orient Cement: For Q4FY19, the company reported over four-fold jump in its net profit to Rs 61.98 crore. Net sales was up nearly 21 per cent YoY at Rs 750 crore, which was above the Street estimates. Considering continued strong pricing trend in its core markets and its sustainability at higher levels in the near term, analysts at Elara Capital maintain a Buy rating on the stock and have raised their price target to Rs 150 from Rs 80 on EV (enterprise value) per tonne of $70 on FY21E capacity.
Star Cement: Strong demand continued to drive Star Cement's performance in the recently concluded quarter, though profitability suffered from higher costs, said Anand Rathi Financial Services. Its continuous efforts on cost rationalisation, however, government subsidies and a strong demand outlook would boost its performance, their analysts said. "Despite capex for coming expansions, the company would still hold to a net cash position in FY21. We are sanguine about its prospects and retain our Buy rating, with a target of Rs 135," analysts at the brokerage wrote in the results review note.
ICICI Securities, too, is positive on the company's prospects and expects revenues to grow at 10.7 per cent CAGR in FY19-21E to Rs 2,244 crore in FY21E backed by volume CAGR of 10 per cent in the same period.
Prism Johnson: The company reported strong performance led by its cement division. Elara Capital expects the cement division to remain in a sweet spot going ahead, given the strong pricing trend and favorable demand scenario in its key market and benefits of cost rationalisation measures. "Therefore, we remain positive and reiterate Buy with a target price of Rs 132 based on a SOTP (sum of the parts) method," they said in a recent note.