Sector to see strong Q3 earnings, but runaway valuations are a concern.
With realisations improving on the back of a sustained increase in prices, cement companies are expected to report robust earnings growth for the third quarter. Across regions, prices have risen by Rs 30-40 per bag sequentially. Given that prices had nearly bottomed out in the previous quarters, these increases are likely to sustain, claim analysts. Thanks to the rising demand, utilisation levels of most companies jumped in November, as cement consumption touched 17.5 million tonnes.
Consumption is estimated at 54 million tonnes in the third quarter, up eight per cent. Channel checks suggest construction activity has picked up in the central states, especially Uttar Pradesh. According to Prabhudas Lilladher, “While consumption in the western region is expected to grow 15 per cent to 12 million tonnes, that in the central region would grow 10 per cent to 9.1 million tonnes on the back of firm demand associated with the UP elections and resumption of construction activity in western UP, post the settlement with farmers.”
This is going to be reflected in the earnings of the top companies. For instance, realisations of UltraTech are expected to remain strong due to its pan-India presence. While volumes are expected to rise four per cent to 10.3 million tonnes, domestic realisations are expected to grow 19 per cent annually (Rs 640 per tonne) to Rs 3,987. However, according to Brics Securities, in an over-supply scenario, the company’s enterprise value/tonne valuation of $147 look too expensive.
This seems to be the case for most cement companies, analysts claim. Stocks of most companies have factored in the positive news before the earnings season. Despite the earnings’ quality, stock prices of the three top players are not “comforting”, say analysts. The market expects ACC to report an year-on-year sales growth of 20 per cent, driven by a volume growth of four per cent and a 16 per cent growth in realisations. However, the company’s margins are expected to come under pressure due to the price increases undertaken by Coal India.
The story is no different for Ambuja Cements. Spark Capital expects the company to report a sales growth of 30 per cent y-o-y, driven by a 10 per cent volume growth and realisation growth of 18 per cent. Despite this, most brokerages have a ‘sell’ call on top players.
