 "Cement industry")
Likely weak demand over the next few months as the monsoon season picks up pace, coupled with no price hikes, may keep cement stocks tepid in the near-term, believe analysts. As a strategy, however, they suggest investors accumulate related stocks on dips, encashing benefits of a rebound in the second half of the current financial year 2024-25 (FY25).
"While a seasonal dip in demand is expected in the near-term, several factors suggest a potential rebound later in the year. The Government's infrastructure push and a continued focus on affordable housing are expected to drive demand in the medium-to-long term," said Shivani Nyati, head of wealth, Swastika Investmart.
Investors with a long-term horizon, thus, may strategically accumulate shares of fundamentally strong companies, she said, picking Ultratech Cement and JK Lakshmi Cement as her top picks.
Over the past six months, cement stocks have performed mixed on the bourses with The Ramco Cements, Dalmia Bharat, and Nuvoco Vistas falling between 10 per cent and 23 per cent. Mangalam Cement, Ambuja Cement, ACC, and JK Cement, on the other hand, surged up to 109 per cent, ACE Equity data shows.
By comparison, the Nifty50 index has gained 13.3 per cent during the period.
Moderating demand
Over the past few years, the cement industry has enjoyed tailwinds from high volume growth, majorly driven by good demand from the housing sector, numerous infrastructure projects such as construction of roads, expressways, airports, metro rail, along with generous rural demand.
While FY23 registered volume growth of 8.8 per cent year-on-year, it was 10 per cent in 9MFY24. Analysts at India Ratings expect demand growth for the entire FY24 to come around 9 per cent Y-o-Y, but slow down to 5-7 per cent Y-o-Y in FY25.
"FY25 demand, although led by a robust infrastructure demand and a steady demand from the housing and commercial segments, would be lower than FY23-FY24 levels. The cement demand to GDP growth multiplier is also likely to moderate to long-term average of around 0.9x in FY25, from a likely elevated level of around 1.2x in FY24," the agency said in a recent note on the sector.
On the pricing front, channel checks by Nuvama Institutional Equities show that the Eastern region saw a hike of Rs 30/bag in the first week of April, while the Northern, and Central regions saw hikes of Rs 10-15/bag.
These hikes, however, were rolled back due to poor demand amid heat wave, unavailability of labour, and general elections.
In the Western, and Southern regions, meanwhile, price hikes announced to the tune of Rs 25–30/bag and Rs 40/bag were revised down to Rs 5/bag and Rs 30/bag, respectively.
"The outlook for H1FY25 looks subdued, and we do not anticipate any substantial price hikes till the general elections get over. We expect power and fuel costs/tonne to further soften Q-o-Q in Q1FY25, which should negate the adverse impact of soft realisations to some extent ", the brokerage said in a recent report.
Going ahead, considering the dynamics between demand and supply and their effect on pricing, CareEdge Ratings forecasts a decline in cement prices by 2-3 per cent for FY25. The agency assumes capacity utilisation to remain under 70 per cent over the medium term, alongside intensified competition among industry players across various regions.
Against this, Vincent KA, research analyst at Geojit Financial Services suggests investors pick stocks with strong fundamentals with valuations comfort.
"While the downward trend in cement prices is expected to continue in the near-term, a recovery is anticipated in H2FY25 post-monsoon, and the Union Budget announcement. Financially, weak cement prices affected margins, but this was partially offset by lower costs and operating leverage for certain companies. We are Neutral on the sector," he said.
Nuvama Institutional Equities, too, has a 'Neutral' stance on the sector, with a 'Buy' rating on JK Lakshmi Cement.
