Analysts upbeat on cement stocks, expect strong bounce back in volumes

Cement is on a solid recovery track, and the wheels have not come off for the primary infra provider because of the anticipated rural demand and state expenditure on roads, ports, and other capital-intensive projects that would need concrete in copious quantities.

So, the stellar Q4 show should continue, well into FY22.

Volumes in the March quarter expanded more than a fourth, and nearly 13% sequentially, driven by strong demand momentum and a low base.

According to analysts, volumes are expected to witness a strong bounce-back as seen in FY21 and

, Ambuja, , JK Lakshmi, Birla Corp and Dalmia Cement are their top picks.

“Focus on return ratio profiles warrants a sector rerating,” said Sandeep Tulsiyan, analyst, JM Financial. “Valuations are in-line with 10-year median EV/EBITDA multiples, but most companies are trading at a discount to their 5-year median multiples.”

Top cement companies, except for Ambuja Cement and

, are trading at discounts to their five-year median multiples. UltraTech and Shree Cement are trading at 13-14% discounts, while ACC, Dalmia and Ramco trade at 9-11% discounts.

The UltraTech management remains cautious on rising Covid cases, but remains optimistic on the strong upcycle for cement demand over the next 3-5 years. It expects demand growth to be broad-based across segments. The company has reported consolidated sales growth of 34% year-on-year to Rs. 14,406 crores in the quarter ended March 2021, while volume grew at 30% year-on-year to 27.78 million tonnes.

Shree Cement’s consolidated revenue grew 23% y-o-y while its profits jumped 59% in the March quarter. Ambuja Cement’s operational performance has been a positive surprise during the March quarter. Operating profits at Rs 970 crore grew by 62% year-on-year and was 34% above consensus estimates. Net profit jumped 67% in the March quarter over the same period the previous year. Birla Corporation net sales improved 26% year-on-year to Rs 2,130 crore while net profit grew 24% to 170 crores during this period.

Orient Cement, a mid-sized cost-efficient player, reported a stellar performance in March quarter backed by 17.1% year-on-year jump in sales volumes of 1.85 million tonnes, along with strong realizations in the company’s key operating regions.

JK Lakshmi’s Standalone revenues grew by 24.6% y-o-y to Rs. 1,322 crore led by a 17.8% y-o-y rise in cement volume to 2.9 million tonnes while reported net profit grew by 35.5% y-o-y to Rs. 136.5 crore. According to the management, urban areas are recovering while the situation is expected to get better in one week from now. The management hopes to demand to start coming back from June 2021.

“Cement non-trade demand is likely to be minimally affected as construction sites remain operational with much better preparedness by construction and real estate companies,” said a note by Shareskhan. “We maintain our positive view on the sector as structural growth drivers remain intact despite the near-term demand challenges led by Covid.”