Cement stocks zoom up to 44% in 3 months. Is the worst over?

NEW DELHI: On the back of price hikes in certain regions and fall in energy prices, cement stocks are now enjoying the limelight on Dalal Street. India Cements has been the top gainer in the pack by ralling around 44 per cent in the last 3 months. Amid Adani Group's acquisition of ACC and Ambuja Cements, the two stocks are now near their 52-week high levels.

Other cement stocks like JK Cement, Dalmia Bharat, The Ramco Cements, Nuvoco Vistas and Ultratech have rallied in between 22-35 per cent in the last 3 months.

Domestic brokerage firm Motilal Oswal is bullish on the cement industry dynamics over the next few years, due to better demand prospects, led by infrastructure and housing sector, increased consolidation in the industry, and regulatory changes in the allotment of limestone blocks.

Over the next three-years, the brokerage expects a demand CAGR of approximately 8 per cent, which is likely to surpass installed capacity CAGR of 5.4 per cent.

ICICI Securities said assuming fuel prices sustain at current levels (or correct further) coupled with price hikes /current price hike absorption, risk-reward is expected to turn favourable in the medium-term perspective as margins or consensus earnings downgrade has likely bottomed out.

Analysts say the industry’s average EBITDA/te could still decline in Q2, turn broadly flat in Q3 and start to inch up from Q4 – both on QoQ and YoY basis - assuming the spread between cement and fuel prices sustains or improves from current levels. “While near-term stock price performance would hinge on the said spread, we believe risk-reward is favourable in the medium-term perspective as margins / consensus earnings downgrades have likely bottomed out,” Harsh Mittal of ICICI Securities said.

The valuations of cement stocks are also not demanding as they are still trading well below their five-year averages, Rakesh Arora of GoIndiaStocks, said. "UltraTech used to trade at 19-20 times its five-year average. There is no reason why it should trade less because actually the runway is looking much better for growth. So there are hardly any red flags," he said.

Top cement stock picks
For Motilal Oswal, Ultratech Cement (target price: Rs 7,515) is the top pick in the largecap space. On the midcap side, it has recommended Dalmia Bharat and Birla Corporation to its investors.

ICICI Securities’ top picks include Ultratech Cement (target price Rs 8,500) and Shree Cement (TP: Rs 25,500). It is also bullish on JK Cement (Rs 3,170) and JK Lakshmi Cement (Rs 630).

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)