Cement shares extend rally; Shree Cement, JK Cement hit new lifetime highs

Shares of cement manufacturers continued their upward movement on Tuesday as analysts believe cement spreads (price minus power and fuel and freight costs) are expected to remain strong in October-March period (H2FY21) on expected pricing strength even as variable costs rise.

Among individual stocks, Shree Cement, JK Cement and Ramco Cement hit their respective life-time highs, while ACC, Dalmia Bharat and Grasim Industries touched their respective 52-week highs on the BSE. Most of these stocks were trading higher in the range of 2 per cent to 6 per cent as compared to a 0.45-per cent rise in the S&P BSE Sensex at 10:07 am.

For October-December quarter (Q3FY21), average price is up 0.8 per cent quarter on quarter (QoQ) so far across India relative to a decline of 1.1 per cent/0.7 per cent QoQ seen in the past 5-10 years. The same is up around 7 per cent year on year (YoY) to Rs 360/bag, Motilal Oswal Financial Services said in a sector report.

The brokerage firm remains constructive on the sector and expects EBITDA (earnings before interest, taxes, depreciation, and amortisation) to grow 18 per cent YoY in FY21 as demand and margins continue to stay above consensus estimates.

Meanwhile, ICICI Securities said that cement prices, that corrected during monsoon, have now improved 1-2 per cent QoQ from October 2020 onwards. "The same is likely to provide the cushion against rising cost of production (CoP) due to higher petcoke prices. Most companies are comfortably placed on the balance sheet front," it said in a Q2FY21 earnings wrap.

In July-September quarter (Q2FY21), cement sales volume recovered sharply leading to sales volumes of 50.5 MT (up 5.6 per cent YoY, 35.7 per cent QoQ) for the quarter.

For Q2FY21, capacity utilisation for the stocks under ICICI Securities' coverage universe improved to above pre-Covid levels. It was up by 125 bps YoY to 68.4 per cent (up 1800 bps QoQ). Sharpest growth was posted by north based companies like JK Cement (25.6 per cent YoY) followed by JK Lakshmi Cement (16 per cent YoY) and Shree Cement (up 14.2 per cent YoY).

"Volume recovery post the lifting of Covid-19 led restrictions has continued to gain strength. After growing by 5 per cent YoY in Q2FY21, we expect volumes for its coverage universe to grow 12 per cent YoY in 2HFY21E," said analysts at Motilal Oswal Financial Services.