Slow capex growth may halt cement stocks' rally

The recent price correction in broader markets has hit cement companies hard.

So far in the current month, smallcap firms like Visaka Industries, Andhra Cements NCL Industries, Sahyadri Indu­stries, and KCP have lost 19.7 per cent, 14.3 per cent, 13.8 per cent, 13.5 per cent, and 11.5 per cent, respectively.

On the contrary, largecap companies, while registering losses for the month, have seen a softer blow.

Shares of JK Cement, Dalmia Bharat, Ambuja Cements, and ACC, for instance, have lost in the range of 5 per cent to 8 per cent during the period, ACE Equity data shows.

By comparison, the Nifty 50 has shed 0.1 per cent in March.

Going ahead, Vishal Periwal, an analyst tracking the sector at IDBI Capital Markets & Securities, believes the ongoing correction in the mid and smallcap stocks will continue to keep a check on cement shares.

“There is a larger trend playing out in the markets right now. Investors are shifting from mid and smallcaps to largecaps due to profit booking.

"This trend is expected to spread to the cement sector as well,” said Periwal.

Analysts expect the upcoming Lok Sabha elections, slated for April or May 2024, along with a slowdown in demand due to lower capex, will keep a lid on cement prices.

This, in turn, will arrest the rally in share prices.

“Typically, execution of infrastructure projects slows down during an election year as no new orders are announced while old ones have a long gestation period.

"Besides, cement prices usually remain under pressure in the March quarter due to low demand and high supply as volumes,” said Manish Valecha, lead cement and construction analyst, Anand Rathi Securities.

Fall in retail price

According to a report by research analyst Motilal Oswal, the all-India average cement price dropped 1.4 per cent in February over January due to price reductions in the East, South, and North Indian regions.

In absolute terms, the all-India average retail price fell Rs 7 per 50kg bag M-o-M to Rs 375 in February as against an average M-o-M increase of Rs 5 per bag for the past three years.

South India saw the highest price cut of Rs 13 per bag, followed by Rs 8 per bag in East India, Rs 6 per bag in North India, Rs 5 per bag in West India, and Rs 3 per bag in Central India.

On the demand side, although most pockets witnessed M-o-M recovery, it has been below the desired levels.

Given this, analysts opine volume push in March may overshadow price hike efforts.

Thus, the industry is unlikely to see any material price hike before April.

However, the pricing impact is expected to be partly offset by lower cost due to operating leverage benefits and weak fuel prices.

On a quarter-on-quarter basis, IDBI Capital expects average cement price to reduce by 4.5 per cent in Q4FY24.

It expects the sector to deliver volume growth of 8 to 10 per cent Y-o-Y during the quarter but anticipates weakness in prices to impact Ebitda growth.

That said, analysts remain bullish on the sector from a long-term lens as India’s cement consumption is expected to grow at a 7.5 per cent CAGR from FY23 to FY26, reaching around 485 million tonnes fuelled by the government’s infrastructure push, and increased urban real estate volumes.

Investment strategy

As a strategy, analysts recommend that investors hold onto largecaps and use any correction in them to accumulate more, as they remain bullish on the sector from a long term lens.

“The cement stocks may not give stellar returns in the near term, but they may push investor wealth by 15 to 20 per cent in FY25.

"We prefer large caps such as ACC and Ultratech,” said Periwal.

Brokerage Pradhudhas Lilladher, meanwhile, has initiated coverage on the sector with a ‘Buy’ rating on ACC, Shree Cement, Ultratech Cement; ‘Accumulate’ on Dalmia Bharat, Nuvoco Vistas; and ‘Hold’ on Ambuja Cements.

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