Analysts say cement stocks now attractive; price hikes to ease margin woes

Analysts believe current input cost headwinds are transitory as likely price hikes by companies will help aid margin pressures.

Cement stocks have succumbed to immense pressure in the last two months, owing to a sharp rise in input costs due to the Russia-Ukraine conflict. The recent steep rise in international petcoke, and coal prices has weakened the near-term outlook for cement companies, which majorly use these commodities for power and fuel requirements.

Analysts, however, believe that these headwinds are transitory as the likely price hikes by companies will help aid margin pressures. 

"The current situation raises concerns on earnings performance for companies, but the impact will not be prolonged as costs are eventually going to be passed onto the end consumer and demand offtake is likely to be good in the coming quarters. This correction is a great buying opportunity. It's like a contrarian bet akin to the auto sector. When the market is underweight, you should think out of the box," said Gaurang Shah, senior vice-president, Geojit BNP Paribas.

Cement shares have sharply underperformed the markets with the likes of JK Cement, Ambuja Cements, UltraTech Cement, ACC, correcting 7-30 per cent thus far in calendar year 2022 (CYTD). In comparison, the BSE Sensex has slipped 0.5 per cent during the same period, ACE Equity data shows.

According to analysts at Sharekhan, on a monthly basis, international and domestic petcoke prices have risen 54 per cent and 24 per cent in March, respectively. Yet, the brokerage believes that the medium-to-long term demand outlook for the sector remains healthy and will sustain going ahead.

"The correction in cement stocks provides an opportunity to invest considering the sector’s strong pricing discipline, which can reverse the weakness in operational profitability seen over the last two quarters," it said. 

Operating profit estimates

Factoring in higher costs, brokerage ICICI Securities has reduced aggregate operating profit estimates for companies by 4.6 per cent and 20.5 per cent for fiscal 2021-22 (FY22) and FY23, respectively.  The brokerage, however, is still positive on the sector as it believes the current elevated input prices are unsustainable in the long-run.

Jefferies, too, has cut its FY23 operating profit estimates for the sector by 19 per cent given the lack of significant price hikes that companies are yet to take in the face of likely margin erosion. IDBI Capital, on the other hand, is confident that companies will increase prices from the April – June quarter given the recent hike in diesel and petrol prices, which further leads to rise in freight costs for these firms.

"Historically, when the central government increases prices of diesel, other industries also raise prices, so, cement players, too, eventually start pushing up rates. They need to increase prices by 10-12 per cent, which will be steep, but they can begin this in a staggered way," Vishal Periwal, head of institutional research, IDBI Capital said. 

According to ICICI Securities, companies need to take price hikes of Rs 35-40 per bag during March-June to sustain operating profit per tonne at Q3FY22 levels. Of this, it expects a price increase of Rs 20-25 a bag to be announced soon.

Among stocks, Shah of Geojit BNP Paribas advises investors to concentrate on large-caps first, and then select mid-caps. "Whatever dips you get, start allocating around 25-30 per cent now, and add more on a correction. Remain bullish on UltraTech Cement, ACC, Grasim, Ambuja Cement, Shree Cement, Dalmia Bharat, Ramco Cement and JK Lakshmi Cement,” he said.