Should investors buy cement stocks post recent market correction?

The cost of the Ukraine-Russia conflict is being paid by global economies. The conflict, which began nearly a month ago, has pushed up prices of various commodities.
Prices of building material, for instance, have increased significantly in the past three weeks owing to the conflict and supply chain bottlenecks in Australia.
 
International petcoke prices rose 57% in the past few weeks and could rise further if coal prices remain elevated. Moreover, the rally in crude oil prices will also lead to more hike in diesel prices.
 
One of the key users of these raw materials is the cement sector, which has been seeing consistent price hike since November 2021.
The sector had exited the December quarter on an already rough patch, marred by weak demand. The geo-political crisis has only weakened the near-term outlook further.

On the bourses, too, cement stocks have corrected sharply in the last few months.
The likes of JK Cement, Ambuja Cements, UltraTech Cement, and ACC have plunged up to 31 per cent thus far in calendar year 2022. In comparison, the BSE Sensex has slipped about a per cent during the same period.

These higher costs, analysts say, will impact cement earnings in the near term. Global brokerage Jefferies has cut its FY23 operating profit estimates for the sector by 19 per cent.
It said, “Earnings visibility has sharply declined for the Indian cement sector due to the unprecedented increase in costs. The industry needs to take an 8% price hike for every $50 per tonne increase in coal+petcoke prices just to maintain its operating profit per tonne.”

That said, analysts believe that the current headwinds are transitory in nature as likely price hikes by companies will help aid their margin pressures over the medium-term. Besides, they feel the current elevated international coal and petcoke prices are unsustainable in the long-run.
 
Vishal Periwal of IDBI Capital expects cement players to hike price from the April-June quarter in line with the recent increase in diesel and petrol prices.

Shah of Geojit BNP Paribas sees cement stocks as contrarian bets. He advises investors to buy select stocks in a phased manner.
 ICICI Securities, meanwhile, is bullish on UltraTech Cement, ACC, JK Lakshmi and Sagar Cement.

In nutshell, cement stocks are likely to trade range-bound in the near term, driven by volatility in commodity prices. However, the sector is expected to see gradual reset in profitability, underpinned by improving demand-supply dynamics, better price discipline and cost optimisation and de-risking efforts.

On Thursday, weekly F&O expiry back home, and US President Biden’s meeting with NATO members will be keenly watched by the markets. Besides, they will also track the two-day European Council meeting on further cues regarding banning.

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