Best Cement Stocks To Buy Now: HDFC Sec Research Report

Cement Riding High

In this report, we highlight long-term trends that are likely to drive the cement industry over the next few years – (1) brighter demand outlook, (2) continued consolidation – as bigger players accelerate capacity additions, (3) industry’s continued efforts towards reducing its clinker factor and increasing productivity of WHRS, (4) business agility in the form of exploring multiple fuel sources to optimize cost and the industry’s ability to manage its fixed costs. In our view, these will support the industry to maintain its multi-year high margins, and support its valuation re-rating. We expect robust 4QFY21E performance by the industry (aggregate EBITDA to rise 12/35% QoQ/YoY).

We also initiate on Sagar Cements (BUY, TP: INR 1,082) enthused by its prudent growth, diversification beyond south market and healthy Opex controls. Post the sharp run-ups in stock prices, we downgrade Shree Cement and Ramco Cements to REDUCE (from ADD). Top picks: Ambuja, Dalmia in large-caps; Birla Corp, JK Lakshmi and Sagar Cements in mid-caps.

Key trends driving the industry over the next few years: In our view, the overall demand outlook appears brighter for the next 3-5 years, led by healthy traction in government-driven low-cost housing and various infrastructure projects, and recovery in the real estate sector. Moreover, retail demand remains healthy too. We expect the industry to continue to consolidate, led by accelerated organic expansions by the bigger companies. Both these factors should boost industry’s pricing power.

On the cost front, we highlight these trends: increasing productivity of newer WHRS plants, rising share of fly ash and slag in blended cement (leading to reduction in clinker factor and carbon emissions). The industry is currently more agile to choose from multiple sources (thermal coal and pet coke). Additionally, in FY21, the industry also exhibited its capability to manage fixed costs during adverse situations like COVID lockdown. These, in our view, should reduce the industry’s overall Opex volatility, boosting margin outlook.

4QFY21E preview: On the basis of 14 cement companies under coverage, we expect 4Q volumes to rise 11% QoQ (+23% YoY on a low base), leading to robust 88% utilisation (multi-year high)! Late price recovery, in our view, should offset the impact of soaring fuel prices. Hence, we expect unitary EBITDA to inch up 1% QoQ (on a high base) to INR 1,205/MT (+10% YoY). Thus, we expect aggregate EBITDA to rise 12/35% QoQ/YoY in 4QFY21E.

Initiate coverage on Sagar Cement: We add Sagar Cements to our active coverage universe, with a BUY rating and a target price of INR 1,082. We like Sagar Cements for its continued capacity/sales expansions, which are well supported by its large limestone reserves and steady balance sheet. The company’s continued reduction in clinker factor and focus on green power are helping it boost margins as well as attain lower carbon emissions.

Earnings and ratings review: We marginally upgrade earnings estimates for some of our coverage stocks, factoring in better volume and realisation trends. We expect industry’s unitary EBITDA to soar to its all-time high of ~INR 1,240/MT in FY21E and to sustain at ~INR 1,200/MT levels during FY22-23E. We roll forward valuations for our coverage universe to Mar’23E (from Dec’22E earlier). We downgrade our ratings on Shree Cement and Ramco Cements to REDUCE (from ADD), post the sharp run-up in their stock prices. We maintain BUY ratings on other stocks under coverage.