Analysts bearish on cement as costs rise

Mumbai: Brokerages are bearish on the outlook for cement companies amid elevated costs and near-term inflation concerns.

In a report on Monday, Jefferies indicated that all-India average cement prices fell 3% in May compared to the previous month as prices in several markets declined due to weak demand. "Downward risk on earnings estimates has resurfaced as price hikes are not sustaining and costs remain elevated," said Jefferies. The brokerage said cement price rises in the northern, eastern and central regions of India in April were robust but a partial rollback of the increase in May is concerning.

CLSA said elevated costs and a change in industry dynamics remain key factors to watch. "We expect the full impact of cost inflation to be reflected in earnings in the first half of FY23. We forecast FY23 industry demand growth of 7% year-on-year and profitability to fall 13% year-on-year," said CLSA.


The brokerage sees uncertainty for cement companies in the near term because of elevated costs and price competition but it also believes that the sector could be on the verge of another round of consolidation with the Adani Group taking over Ambuja and ACC. UltraTech is CLSA's top cement sector pick.

ACC shares ended flat at ₹2,138.10 on Tuesday while that of Ambuja ended down 0.45% at ₹363.30. UltraTech shares ended 0.5% lower at ₹5,554.60.

CLSA also noted that listed companies in the cement space reported flat growth in volumes from year-ago levels in the March quarter and an 8% growth in the financial year ended March 31, 2022.

The brokerage expects profitability to see a sharp decline in the first half of the ongoing financial year due to the impact of cost inflation and lower volume hurting earnings.

"For our covered companies, we expect profitability to fall 13% year-on-year in FY23, with the second half profitability to be better than 1H. We believe profitability improvement has to be driven by lower costs rather than price increases," said CLSA.