As major acquisitions among India’s cement companies come to fruition, JM Financial sees various drivers, including strong demand, shifting market’s focus to profitability and returns.
The brokerage has initiated coverage on ACC Ltd., Ambuja Cements Ltd., Birla Corp., JK Cement Ltd., and UltraTech Cement Ltd. with a ‘buy’ rating, while Dalmia Bharat, Ramco Cements, Shree Cement and Star Cement have received a ‘hold’ rating. “Our top picks are UltraTech, Ambuja and JK Cement,” the brokerage said.
“Our stock selection is guided by scale, diversification, marketmix, growth pipeline/aspirations, incremental RoIC and valuations,” the brokerage said. “Typically, larger cement companies are associated with a diversified or pan-India presence, resulting in lower earnings volatility.”
Cement demand is expected to remain strong, particularly after a breather in FY25, with key demand drivers looking positive and the sector poised for 7-8% CAGR over FY25E-27E.
Additionally, the industry’s increasing focus on cost optimisation and de-risking, should help reduce cyclicality over time, the brokerage noted. “As a result, investors should look beyond short-term cement price fluctuations and focus on structural changes that are likely to drive long-term profitability,” it said.
“Intense competition, the battle for market share, and efforts to secure favourable M&A deals have kept industry pricing under pressure, with profits hitting multi-quarter lows in 2Q FY25,” the brokerage said.
The industry has seen accelerated consolidation due to Adani Group’s foray into the cement business, larger players’ response by ramping up their capacity expansion plans, and smaller and regional players’ conservativeness in their capacity additions in recent years, the brokerage said.
Demand could remain strong over the next few years, led by government spending on low-cost housing, infra push, improved outlook on urban housing, stable rural housing demand, and real estate revival, JM Financial said.
Besides, the industry has increased its focus on the cost curve (potential savings of Rs 150-200 per tonne) to reduce exposure to input cost fluctuations and carbon emissions via increasing share of green power, blending ratio, logistics optimisation and higher operating leverage, it noted.
“We anticipate a gradual recovery in prices driven by a potential demand revival alongside higher clinker utilisation, increasing consolidation, which reduces risk of irrational behaviour and the necessity for a sustainable 5-6% price hike (even for brownfield expansions), given the current low price levels from an asset-return perspective,” it said.
Among stocks, ACC Ltd. appears a favourable bet to the brokerage given its attractive valuation of volume growth visibility, imminent from capacity expansion and master supply agreement with Ambuja. The firm will likely be a beneficiary of Rs 500 a tonne cost savings targets through various initiatives by Adani group by FY28, the brokerage said.
Strong balance sheet, along with healthy return ratios; and eventual consolidation with parent entity Ambuja over the medium term are also favourable.
Within the group, the brokerage prefers Ambuja over ACC given higher growth visibility.
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. Read more on Markets by NDTV Profit.ACC Ltd. appears a favourable bet to the brokerage given its attractive valuation of volume growth visibility. Read MoreMarkets, Business, Notifications
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