Foreign brokerage CLSA said that cement sector profitability will be at a multi-quarter low for its coverage universe in September quarter, but a recovery in margin is likely to occur in December quarter. It said that a recovery post festive season would be key to watch for and there would also be a ramp up of infrastructure projects and support for rural spending as next year is the year prior to general elections.
UltraTech cement is preferred over Ambuja Cements because of the well-laid organic growth roadmap and relatively cheaper valuations.
In June of last year, spot petcoke prices peaked and have dropped 30 per cent since then, according to the CLSA. It expects fuel costs to increase in September quarter and then correct due to inventory and time lag.
It said that the CAGR of the three-year period is 6 -- 8 per cent.
CLSA's channel checks suggest that cement prices are down 3 -- 6 per cent quarter-on-quarter QoQ across regions, which is slightly higher than normal seasonality. It said that price declines have been greater in North and Central India compared to other regions, and there has been an attempt to raise prices in November.
We expect margins to recover in Q 3 FY 23 due to lower fuel prices and benefits of operating leverage. Demand has been quite resilient, growing by high single digit YoY, while prices have fallen by 3 -- 6 per cent QoQ. The demand outlook and price increase post festive season end-October would be key to watch for, it said.
CLSA has an outperform rating on UltraTech Cement with a target of 7,200. This is less than its target of 7,365 on the stock in June of this year. The shares of UltraTech Cement were trading at Rs 6,282 on Thursday. The Rs 7,200 price target suggests a 14.60 per cent potential upside on the price.
The brokerage has a'sell' rating on Ambuja Cements with a target of Rs 470. This stock traded at Rs 510.80 a piece in Thursday's trade.
For the September quarter, CLSA expects Ebitda per tonne for its coverage to be at a multi-quarter low, down 30 per cent QoQ to Rs 700 per tonne on lower prices and higher costs.
It expects cash costs to increase 3 -- 4 per cent QoQ by 17 per cent YoY on higher power and fuel costs and negative operating leverage.
CLSA said that the cement sector is in the midst of a demand upcycle but utilisations are likely to be lower for longer, given high-capacity expansions. The industry consolidation will not be enough to offset the ongoing wave of capacity expansion and will likely lead to softer margins and expensive inorganic expansion among tier 1 players over the medium term, it said.