Analysts at JM Financial said that cement stocks have rallied and are now sitting at high trading multiples.
Domestic cement companies saw a sharp uptick in realisations during the April-June quarter, offsetting the escalations in the power/fuel and freight costs, according to domestic brokerage and research firm JM Financial. Realisations were up 7% on-quarter basis against the expected 4% rise, driven by price hikes and change in the mix. “As a result, EBITDA/t fared better on-quarter to Rs 1,359 (+15% QoQ), as a rise in realisations more than offset costs,” the brokerage report said. “We expect the power/fuel costs to continue to rise in 2Q sequentially as the increased impact trickles into the numbers,” JM Financial added.
In terms of stock picking, analysts at JM Financial said that cement stocks have rallied and are now sitting at high trading multiples. “We continue to maintain positive stance on companies prioritising growth along with sharp focus on profitability as a strong demand undercurrent is visible,” they added.
Target price: Rs 8,000
The company saw volumes recover in June with utilisation going strong in the North. The management of Ultratech Cement believes that going forward, infra projects and the rural segments will continue to drive the demand for cement. Capex initiatives remain strong with the company having spend nearly Rs 10 billion on capex during the first quarter. Further, Ultratech Cement has planned aggressive expansion at a relatively low capital cost. Currently, the stock trades at Rs 7,425 per share, implying a 7.7% upside from current levels.
Target price: Rs 2,400
Realisations for Dalmia Bharat were up 7.9% on quarter basis at Rs 5,284 per tonne. The company is targeting a predictable growth of 15% CAGR over next 10 years. It intends to expand to become a pan-India player with capacity expansion, the report said. Dalmia Bharat plans to expand capacity to 110-130MTPA by financial year 2029-30. The company has also planned to use 10% of OCF towards shareholders’ returns. On Wednesday, the stock was trading at Rs 1,996 per share, translating to a 20% upside potential from current levels.
Target price: Rs 3,500
In terms of volumes, JK Cement saw slight moderations in July and August owing to the monsoon season, while prices have corrected by Rs 5 – 6 per bag on average with higher correction in the Southern region. JK Cement started executing their 4MTPA expansion at Panna, MP along with a split grinding unit of 2MTPA at Hamirpur in UP. “The total outlay for the project is envisaged at Rs 29.7bn (including land). The projects are expected to be funded through Rs 17bn of debt at subsidiary level and Rs 13bn of equity infusion by JK Cement,” JM Financial said. The stock was up at Rs 3,184 per share on Wednesday. For it to reach the target price, JK Cement stock will need to surge 10% from the current price.
JK Lakshmi Cement
Target price: Rs 790
JK Lakshmi Cement’s management expects to do a volume growth of 10-11% in the financial year 2021-22. Demand did show signs of improvement between the first week of June and the second week of July before monsoons arrived. The company said that July prices were stable in East and Gujarat while experiencing pressure in North. Prices are expected to rise by Rs 25/bag post-monsoon. In terms of capex, the company plans an expansion of 2.5MTPA in Udaipur Cement Works (UCW) at an estimated cost of Rs 14bn, to be funded through a 70-30 mix of debt and equity. The stock trades at Rs 699 per share, implying a 13% upside from current levels.
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