Do you own Ultratech, Ambuja or ACC: What should you do with cement stocks?

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Cement stocks in India 2022

One sector that is a hot pick in recent times is cement. Most stocks in the sector are outperforming the market. If you plan to get exposure in the sector, this article will help you with the stock price movement and target price of top cement companies in India.

Price movement of top 5 cement companies in India

The below table shows the 1-month, 1-year, and 5-year returns of top cement companies as of 14 September 2022 :

What is happening with the Cement sector in India?

If you look at the returns in the above table, it is evident that the cement stocks have outperformed the market by a considerable margin. However, if you look at long-term returns (5 years), none of the stocks doubled investors' wealth. Most of them have underperformed the NIFTY50 index in the same period. The recent rally is an indication that something has changed in the sector. 

Why are cement stocks rallying?

Below are the reasons for a rally of cement stocks in the past month:

  • The surge in the cement stock is mainly attributed to the overall positive outlook in the sector going forward. Also, Ambuja Cements' fundraising plan was announced this week.
  • Stocks like Ambuja and ACC are showing movement north after the Adani family's open offer to acquire additional stake in the companies.
  • Additionally, brokerage firm Nirmal Bang has revised the rating for the sector. It has upgraded its view from NEUTRAL to POSITIVE, citing stable competitive intensity, improved pricing, lower operational costs, and higher profitability. The firm added that ACC and Ambuja operate at higher utilization levels and meaningful incremental supply from both companies is likely only after two-three years. Hence, the profitability of the industry will be maintained in the near term.
  • Analysts also believe that the cement stocks mainly surged as price hikes, petcoke cooling off, margins likely to bottom out in Q2FY23, and anticipation of volumes as well as demand rise in the second half of the current fiscal.  
  • According to the Emkay Research report, cost pressure is expected to ease in coming quarters as the global petcoke prices have corrected by around 40% in the past four months.

Ultratech Cement share price: Deepdive

UltraTech Cement share target price: Analysts' view

Motilal Oswal: The brokerage firm has given a BUY rating with a target price of Rs 7210 per share. They expect a growth of ~9% in sales volumes in FY23-24. Also, continuous improvement in leverage will help the company to pursue growth opportunities in the future. The firm expects it to trade at higher-than-historical multiples, given its leadership position and strong growth opportunities.

ICICI Securities: Analysts at Isec have given a BUY rating with a target price of Rs 8500 per share. They believe the company has a diversified pan-India market presence and with timely capacity creation, premium brand positioning, and increased cost efficiencies – is better placed to gain market share / improve margins.

Edelweiss: The firm has retained a HOLD rating for the Ultratech cement with a target price of Rs 6217 per share. While on-track Capex plans and efficiency focus are heartening, the weak sector fundamentals hold the firm back from ascribing a higher valuation multiple to the stock.

ACC share price: Deepdive

ACC share target price: Analysts' view

Motilal Oswal: The firm has downgraded the stock to NEUTRAL and revised the target to Rs 2260 per share. EBITDA/t dipped 56% YoY to Rs 563. They expect ACC’s EBITDA and profits to decline at a CAGR of 4% and 6%, respectively over CY21-23.

Axis Securities: The firm has given a HOLD rating with a target price of Rs 2010 per share. They value ACC at 11x its CY23E EV/EBITDA, factoring in the higher cost, and await margins to improve.

CITI: It maintains BUY on ACC with a target price of Rs 2,460. The brokerage firm said valuations with upsides from potential synergies make it an attractive bottom-up play.

Ambuja Cements share price: Deepdive

Ambuja Cements share target price: Analysts' view

BofA Securities: The firm has maintained a BUY rating and has given a target price of Rs 410 per share. It lowered its earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne estimate on Ambuja Cement's stock for 2022 by 9% and 2023 by 6%.

CITI: The firm has revised the rating to SELL and has revised the target price to Rs 335 from Rs 400 earlier. Citi said the company’s better-than-expected earnings were driven by lower costs.

Credit Suisse: The brokerage firm has downgraded the stock to NEUTRAL and cut the target price to Rs 335 per share. They see EBITDA per tonne improving to Rs 1,150 in 2023 and to Rs 1,180 in 2024, from Rs 1,030 in 2022. This implies that they see realization improving in the future. It has also revised its earnings estimate by factoring in higher energy costs in the near term.

Shree Cement share price: Deepdive

Shree Cement share target price: Analysts' view

Emkay Global: They have assigned a BUY call on Shree Cement with a target price of Rs 23,550. The time period given for the brokerage is one year. It added that expensive valuations appear unjustified for the stock.

KRChoksey: The firm has given a BUY rating with a target price of 25,085. They have lowered the EBITDA margin assumption for FY23E/FY24E from 29.6%/30% earlier to 26.3%/27.6%. However, they believe with an increase in utilization level, economies of scale will kick in, which will help the company to withstand the margin pressure.

India Cements share price: Deepdive

India Cements share target price: Analysts' view

HDFC Securities: The firm has given a BUY rating with a target price of Rs 208 per share.

Yes Securities: The brokerage firm has given a buy rating with a target price of Rs 230 per share and a time period of one year.

What should investors do?

According to Kotak Equities, the Indian cement sector will recalibrate on multiple fronts in the next 3 years. As per them, record low leverage is driving a step-up in capacity additions at 5.5% CAGR over FY2022-26E. They expect demand to see a 7% CAGR in FY22-26E after a tepid FY19-22 and keep utilization stable. Investments in green energy should continue to reduce costs and carbon emissions. Large players should remain acquisitive and aid in sector consolidation.

Investors planning to take a position in the above stocks should pick companies that match their risk profile.