Are cement stocks disconnected from reality?
ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd have gained 17-32% in the last six months. Does this suggest that all is hunky dory in the sector? Not really. The muted trend in cement prices has become a niggling worry.
Prices have fallen even in a seasonally strong March quarter (Q4) and remained weak for the fifth month in a row. As such, FY24 exit prices could be subdued as the year-end chase to meet volume targets intensifies. This would weigh on the near-term realization outlook.
It also means that the benefits of softening input costs and the recent cut in diesel prices would help the sector’s earnings performance only to a certain extent. “Given the sharp drop in pricing and continued weak demand, we expect Ebitda/mt for cement industry to contract by at least ~Rs100 per tonne, in Q4FY24, despite correction in operating costs," said Mangesh Bhadang, vice president, Centrum Broking. Ebitda is earnings before interest, tax, depreciation and amortization.
Notwithstanding a significant drop in pricing in recent months, the cement index (market capitalization weighted index of 10 listed cement stocks) has risen 17% over the past six months. This suggests a growing disparity between stock prices and ground reality, cautions Bhadang. Additionally, commentary from various dealers’ channel checks suggests that a meaningful improvement in demand and pricing is possible only post-monsoon in the second half of FY25.
Why are stock prices surging then? The narrative in cement stocks seems to be driven by the pace of capacity additions amid elevated competitive intensity. Robust cash flows have pushed cement companies to add capacities in the last decade, according to Tushar Chaudhari, analyst at Prabhudas Lilladher. Now,
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