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Cement stocks have been rallying in the past few days and domestic brokerage and research firm Motilal Oswal expects cement demand to rise 2-3% YoY in July-August 2022 (5-6% on a three-year CAGR basis). Demand in a few markets (such as Punjab) was impacted by sand unavailability issues. However, it expects cement demand to improve after the monsoon season ends.
“In 1QFY23, cement OPM declined by 1.2 pp quarter-on-quarter (QoQ) as the improvement in realization partly offsets cost increases. We expect margin in 2QFY23 to contract sharply due to the combined impact of high-cost fuel consumption, correction in cement prices, and negative operating leverage,” the note stated.
UltraTech Cement is Motilal Oswal’s top stock picks in the largecap space. The brokerage house has preferred Dalmia Bharat shares and Birla Corp in the midcap space.
The brokerage house is positive on cement industry dynamics over the next few years, due to better demand prospects, led by the Infrastructure and Housing sector, increased consolidation in the industry, and regulatory changes in the allotment of limestone blocks. Over the next three-years, we expect a demand compound annual growth rate (CAGR) of around 8%, which is likely to surpass installed capacity CAGR of 5.4%.
Motilal Oswal prefers regions with a favorable demand-supply situation and better pricing power like North and Central India, and to some extent the West (where Infrastructure demand remains robust).
“Spreads (realization less variable costs) seems to be lower by INR425-430/t in 2QFY23. However, spreads in September 2022 are up INR100/t v/s its 2QFY23 average. Profitability should bottom out in 2QFY23, barring any adverse movement in Cement and coal prices. Cement prices tend to improve after the festive season,” it added.
Capacity expansion would aid the sector’s long-term volume growth outlook. However, with capacity additions in full swing, cement demand must improve adequately. Else, it would weigh on the sector’s capacity utilization levels, as per analysts.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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