Cement companies in India reported decent earnings in the second quarter of FY24 led by robust volume growth and easing cost pressures.
These companies posted volume growth of 14% year-on-year (YoY), revenue and EBITDA growth of 13% and 73%, while adjusted net profit growth of 162% YoY in Q2FY24. Operating margins improved by 560 bps YoY.
The volume growth during the quarter was driven by better demand from both trade and nontrade segments.
According to Axis Securities, demand for the cement sector remains robust on account of higher government spending on infrastructure and housing; robust real estate demand and improvement in IHB (Individual Home Buyers) demand and lower cost of construction.
Meanwhile, cement prices are trending higher by 3-5%. Price hikes were taken in the month of September and October 2023 with slight roll back in some regions. Sustainability of cement prices is crucial for better profitability as fuel prices are up by 25-30% from their recent lows.
“We remain positive as demand drivers are intact. We expect cement demand to grow at a CAGR of 11-12% over FY23-FY25E. Despite companies adding capacities, we believe that cement demand will outpace the cement supply. Sustainability of higher prices and trend in fuel prices remains key monitorable,” Axis Securities said in a report.
Axis Securities picks three cement stocks to buy which it believes are likely to deliver strong earnings growth on the back of robust fundamentals. These stocks are Ultratech Cement, JK Cements and JK Lakshmi Cement.
Ultratech Cement | Buy | TP: ₹9,680
Ultratech Cement witnessed robust volume growth of 16% and capacity utilization of 75% in the quarter ended September 2023 despite the monsoon impact indicating robust cement demand in the country. The company’s organic capacity expansion plan is progressing well.
“We expect the company to report volume growth CAGR of 12% over FY23-FY25E. Higher Cement prices, increase in premium product sales, along with the benefit of lower fuel prices and increased green energy consumption will lead to higher EBITDA margins,” said the brokerage.
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It expects the company to report EBITDA/tonne of ₹1,180 and ₹1,290 in FY24E/FY25E versus ₹1,005/tonne in FY23 on account of higher volumes, better realizations, and cost optimization. It expects the company to grow its Volume/Revenue/EBITDA/APAT at a CAGR of 12%/13%/27%/41% during FY23-FY25E.
Axis Securities has a ‘Buy’ rating on the stock with a target price of ₹9,680 per share, implying an upside of 10% from Friday’s closing price.
JK Cements | Buy | TP: ₹3,830
JK Cements recently expanded its gray cement capacity by 4 mtpa in the demand-accretive central India region, resulting in positive EBITDA at 75% capacity utilization. Upon completion of the ongoing capacity expansion (gray cement), total capacity would increase to 24.2 mtpa. This is expected to drive the company’s volume growth in FY24, Axis Securities said.
It expects the company to post volume growth of 13% CAGR in FY23-25E. During the quarter, the company reported better-than-expected EBITDA margins due to higher volumes, better realization, and lower fuel costs.
“Additionally, new units’ operating expenses are expected to normalize as utilization further improves in FY24, which will drive the company’s EBITDA margins. We expect the company to report an EBITDA/tonne of 1075/1170 in FY24E/FY25E. This will be driven by higher volumes, improved realizations, and lower costs,” the brokerage report said.
It has a ‘Buy’ call on the stock with a target price of ₹3,830 per share, expecting an upside of over 9% from Friday’s close.
JK Lakshmi Cement | Buy | TP: ₹880
Axis Securities expects JK Lakshmi Cement to grow its Volume and Revenue at a CAGR of 9% and 10% over FY23-25E. The company is working on many levers such as geo-mix, higher production, sale of blended cement, increasing proportion of trade sales, premium and value-added products, logistic efficiency, and use of more renewable power to increase its EBITDA/tonne to four-digit number in the next 12 to 18 months.
“The benefits of these initiatives have started to reflect. We expect the company’s EBITDA/tonne to grow at 16% CAGR over FY23-25E to ₹880/tonne. This will be driven by improved realization, higher volume, and cost-saving initiatives,” said the brokerage.
It has a ‘Buy’ rating with a target of ₹880 per share.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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