Shree Cement, UltraTech likely to benefit from any uptick in demand

After witnessing demand pressure during the first three quarters of FY20, the Street now hopes for a recovery in cement volumes during the March quarter. Cement players, too, have hiked prices in January anticipating a pick-up in demand. Although the Street remains watchful of the sustenance of these price hikes, stocks of cement firms have already started gaining.
 
While UltraTech and Shree Cement have risen 13-16 per cent since their December lows, ACC and Ambuja Cements have lagged, with gains of 6-9 per cent. In fact, even on a longer time frame of six and 12 months, ACC and Ambuja have lagged their peers.
 
The underperformance of LafargeHolcim group stocks can be attributed to the slower pace of capacity additions by ACC and Ambuja. Though these two have announced capacity expansions as well, they have lagged in terms of pace. Peers such as UltraTech and Shree Cement have continued ramping up capacities on a regular basis and are seen to be major beneficiaries of any uptick in demand. This is the key factor behind the Street being more optimistic on them.
 
According to Kotak Institutional Equities’ data, with 95 million tonnes (mt) in capacity as of FY19, UltraTech was leading the industry with the highest market share across all regions (all-India average market share of 20 per cent).
 
UltraTech has consistently added capacities and, after completion of its acquisition of Binani Cement, it is amalgamating and turning around capacities acquired from Century Textiles.

UltraTech’s capacities have thus risen to 117.4 mt, including overseas assets. Shree Cement, with 38 mt capacity, remains the second-largest in terms of individual company-level capacity and average all-India market share of 8 per cent, shows the Kotak data. ACC and Ambuja, with 34 mt and 30 mt capacities, stood at third and fourth spot with 7 and 6 per cent market share, respectively.
 
Analysts such as Binod Modi at Reliance Securities, though, say that the Street is not factoring in the 5.1 mt capacities of ACC coming on stream by 2021. Hence, ACC could be considered on dips.
 
Even Ambuja Cements’ 3.6 mt clinker capacities coming on stream by September will improve its clinker-to-cement capacity ratio, from 60 per cent at present. Nonetheless, this is still over 8 months away.
 
In terms of per-tonne profitability, too, UltraTech and Shree Cement have mostly been ahead. For the December quarter, too, analysts at Centrum Broking expect UltraTech and Shree Cement to report per-tonne profitability of Rs 996 and Rs 1,227, much higher than estimates of Rs 489 and Rs 800 for ACC and Ambuja, respectively.