Cement sector to revive on monsoon, rural demand; UltraTech Cement, JK Cement could be good bets

By: | Updated: June 6, 2017 6:02 PM

Experts say cement sector will report growth in first quarter of FY17 driven by strong improvement in price especially in North and Central regions, moderated volume growth (10% yoy in 1QFY17 for the coverage universe), and continued benefit of lower power and fuel cost.

Experts say cement sector will report growth in first quarter of FY17 driven by strong improvement in price especially in North and Central regions, moderated volume growth (10% yoy in 1QFY17 for the coverage universe), and continued benefit of lower power and fuel cost. (Photo: Reuters)Experts say cement sector will report growth in first quarter of FY17 driven by strong improvement in price especially in North and Central regions, moderated volume growth (10% yoy in 1QFY17 for the coverage universe), and continued benefit of lower power and fuel cost. (Photo: Reuters)

Cement companies may register strong first quarter earnings on account of sharp rise in prices during April-June 2016. Since the beginning of the ongoing financial year, cement stocks gave an average return of 30 per cent till July 5 with Kakatiya Cement Sugar & Industries shares gained the most — 109.52 per cent. Other cement majors such as Deccan Cement, Sagar Cement, The Ramco Cements, Jaiprakash Associates and Heidelberg Cement rallied 80.70 per cent, 73.80 per cent, 42.74 per cent, 36.47 per cent and 34.22 per cent, respectively.

Kotak Institutional Equities in its latest report on the cement sector has said that the first quarter of FY17 will report growth in earnings driven by strong improvement in price especially in North and Central regions, moderated volume growth (10% yoy in 1QFY17 for the coverage universe), and continued benefit of lower power and fuel cost. The brokerage house continues to maintain ‘Go North’ after a steallar fourth quarter, the benefits of which will reflect in the current quarter’s earnings for JK Lakshmi, JK Cement and Shree Cement who are mostly based in North India.

Market experts believes rise in cement prices in various region supported market sentiments in the first quarter of 2016-17. Cement prices have increased pre-monsoon, particularly in the North by 10 per cent on quarter-on-quarter basis. The central region also witnessed a rise of up to 7 per cent in April-June 2017 period. In the western market too, prices have increased in Mumbai (to Rs 300 per bag from Rs 265-270 per bag) and Gujarat (by Rs 20-25 per bag to Rs 260-270 per bag).

According to Reliance Securities, demand scenario continued to remain favourable on yearly comparison due to low base, pick-up in project segment sales with increased government spending and continued traction in construction of roads and highway other key infra projects. The brokerage house is bullish on UltraTech Cement in largecap space.

Religare Institutional Research believes UltraTech Cement, ACC, Ambuja Cements may see warm growth of 5 per cent, -2 per cent and -2 per cent on year-on-year basis, while South-based players like Orient Cement and India Cements may post a much sharper 15 per cent and 32 per cent YoY growth. Companies like Shree Cement, JK Cement, JK Lakshmi Cement would benefit from added capacities to grow at 18 per cent, 14 per cent and 18 per cent YoY. The brokerage house is bullish on UltraTech Cement (target price: Rs 3,500), Shree Cement (Rs: 16,500), JK Cement (Rs 720), Ambuja Cement (Rs 270) and Grasim Industries (Rs 5,250)

Cement companies reported nearly 50 per cent year-on-year average fall in net profit figures for the quarter ended March 31, 2015. Net sales of cement companies fell 1.15 per cent during the period. Experts sees decent demand uptick in 2016-17E on account of visible pickup in construction activities from new infrastructure projects, improvement in rural demand on backdrop of possible favourable monsoon, and pick-up in housing activities especially under “Housing for All” scheme and from IHB segment etc.

Religare upgrade its 2016-17 and 2017-18 operating profit estimates for Ambuja Cement, ACC, Shree Cement by 4 per cent to 15 per cent on account of strong volume growth in the last quarter of 2015-16 and price increase which may lead to a higher EBITDA per tonne in Q1FY17.

“We expect the sector to see a revival in the medium term, with a strong FY17 ahead as a normal monsoon likely drives up rural demand in H2FY17,” the Religare said in a research report.

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