Business Standard

Volume IconCement, steel, paint firms eye painful quarters ahead

Rising interest rates, along with elevated raw material cost, are hitting the building material sector hard. Find out about the near-term sore points for related industries and how to play the theme.

ImageNikita Vashisht New Delhi
Mumbai real estate, Mumbai housing

Photo: Bloomberg

Equity markets are expected to remain on choppy on Thursday as investors digest a second consecutive interest rate hike by the US Federal Reserve.
Back home, the Reserve Bank of India had pushed up repo rate last week. However, rising interest rates, along with elevated raw material cost, pose a challenge to the building material sector, which includes ceramics, paints, pipes, cement and steel.

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Related companies felt the pain of mounting input costs in the fourth quarter of FY22, and analysts expect subdued demand in the coming months due to higher raw material prices and rising borrowing costs.

Ronald Siyoni, AVP - Research, Sharekhan by BNP Paribas says building material space witnessed margin pressure during Q4FY2022. Demand remained healthy from government infrastructure projects and urban housing. Slackness was seen in tier-III and below, and rural segments, he says adding that margin pressures to continue till H1FY23. The sector, as a whole, should see improvement from H2FY2023 as energy costs recede

Analysts have downgraded related sectors, and have cut earnings estimates to factor-in near-term challenges. 

Nirmal Bang has cut its FY23 and FY24 Ebitda estimates for cement sector due to aggressive capacity expansion plans by multiple players, cost inflation environment etc, which will affect the sector’s earnings in the medium-term. 

Nirmal Bang, for instance, has cut its FY23 and FY24 Ebitda estimates for cement sector due to aggressive capacity expansion plans by multiple players, a prolonged cost inflation environment, lack of pricing power given the elevated competition, and deteriorating demand drivers.

Meanwhile, ICICI Securities is ‘cautious’ on the paints sector due to similar reasons.
As regards steel and ceramics sectors, Anil Rego of Right Horizons PMS believes near-term pain clouds sector outlook.

Speaking to Business Standard, Anil Rego, Founder and Fund Manager, Right Horizons PMS says coking coal prices impacting steel industry. Steel companies expected to be under pressure on account of export duty hike, he says. Sector has been de-rated; outlook weak. However, soaring gas prices to dent margins of ceramic companies. Kajaria, Somany have taken multiple price hikes. Margins are expected to normalise by Q3FY23. 

That said, analysts don’t see any significant impact on real estate demand or construction activity in the long-term.

Ram Kalyan Medury, Founder & CEO of Jama Wealth, says high interest rates may defer second home’s buying. But commercial construction may not be hugely impacted. Real estate a safe haven bet; will keep demand buoyant for some time, he says. Sector has seen recovery and global factors may not dampen this. 

Analysts suggest investors avoid taking fresh positions in related counters for the time being. 
However, a robust long-term view given strong real estate sector bookings; govt’s focus on infrastructure creation; easing commodity prices from H2FY23; and lower valuations make them attractive from two-three years perspective.
 
Brokerages are bullish on UltraTech Cement, Asian Paints, Kajaria Ceramics, Century Plywoods, Greenply Industries, and APL Apollo Tubes.

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First Published: Jun 16 2022 | 7:00 AM IST

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