India’s cement sector is set for a good structural recovery, despite near-term uncertainties, says a report from Edelweiss Securities. The firm expects cement demand to increase at a compounded annual growth rate of 7.2 percent to almost 560 million tonnes by financial year 2025-26.
The Demonetisation Impact
The report states that the rising demand for housing in India is likely to push up the demand for cement. While Edelweiss believes that the Narendra Modi government’s move to ban currency notes of higher denomination may lead to slowdown in the real estate sector, it sees citizens looking to invest in housing as compared to keeping their assets in cash.
The Leverage Roadblock
The Edelweiss report finds that the current scenario leaves many incumbent cement players incapable of servicing their debt. Unless the price-volume trade of these companies gains momentum, adding more capacities remains out of question, say the report’s authors. The report doesn’t expect national level cement capacity addition to exceed 2-4 percent of the players’ total capacity.
- The report further states that UltraTech Cement’s attempts to acquire the assets of Jaiprakash Group’s cement business, leaves little or no scope for any further large-scale capacity addition.
- Edelweiss has also pointed to the high amount of dividend paid out by LafargeHolcim’s subsidiaries so as to reduce the parent company’s debt pile.
The Utilisation Picture
Edelweiss expects capacity utilisation in FY17 to be lower than FY16. Here is the report’s bull and bear case of the utilisation picture going ahead:
- Bull Case: A demand CAGR of almost 7.2 percent over FY16-20E will see utilisation levels at nearly 85 percent by FY19. A demand CAGR of almost 9 percent will see levels near 90 percent by FY19.
- Bear Case: A demand CAGR of almost 6 percent will see utilisation at nearly 80 percent from the current level of 70 percent, which is the lowest in a decade.
- The report expects central and east India to lead the pick-up in utilisation while expecting the southern region to operate at lower levels till FY20.
Edelweiss’ Top Cement Picks
Based on lower capital allocation, ability to garner market share and cost leadership, Edelweiss has picked out companies as their top picks from the cement sector. The report states that investors holding the stocks for a period of 4-5 years can benefit from the secular uptick in the sector and the upsides to prices can range between 1.8-2.4 times current market prices.
- Edelweiss has a ‘BUY’ rating on Shree Cements with a revised price target of Rs 20,300 from an earlier target of Rs 19,753.
- Ultratech is another top pick with a revised price target of Rs 4,488 from the earlier Rs 4,200.
- In the midcap space, the price target on JK Cement has been reduced to Rs 915 from Rs 953.
- Edelweiss has raised its price target on India Cements to Rs 152 from Rs 125 earlier.