Cement Firms' Profitability Weak, Some Players Better Placed: Goldman Sachs

Profitability of cement companies in the ongoing fiscal has been one of the weakest in the recent past, according to Goldman Sachs. The brokerage expects the next financial year to be only slightly better as the fight for volume share will keep pricing in check, it said.

Despite this, consolidation of market share, capacity and resources will sustain premium valuations for the large players, Goldman said.

Even as industry profitability will likely be weak in fiscal 2025, "we have seen that while stocks have underperformed the index, the magnitude of correction has been far less, suggesting continued multiple re-rating".

The brokerage has attributed this to the ongoing industry structure change, where the large players are growing market share, investing in new capacity, investing in green energy, and creating long-term visibility through acquisition of limestone reserve. "Hence, we expect that despite the weak near-term numbers, the cement sector—especially the large players—are likely to trade at premium to their historical valuation ranges," it said.

Goldman has cut its FY25-FY27 Ebitda estimates across the coverage, largely reflecting lower pricing assumption, given the limited price hikes in third quarter, and the supply-demand balance.

The brokerage likes Ultratech Cement Ltd.'s ability to be the consolidator, which should drive a valuation premium. Over the next 12-15 months, Shree Cement Ltd. and Ambuja Cements Ltd. are adding equivalent organic capacity as Ultratech. It maintained a 'buy' rating on Ultratech, 'neutral' stance on Shree, Dalmia, Ambuja, and 'sell' on ACC Ltd.

Citi said that even if prices are hiked by a larger quantum, the entire amount is unlikely to sustain, as more supply is added by larger producers (fight for market share) and as we approach year end volume push.

The brokerage continues to maintain its preference for companies focused on growth (capacity and volumes) and cost efficiencies. It has a 'buy' on UltraTech Cement, ACC, Ramco Cements Ltd., Shree, Dalmia Cement, JK Cement, and Grasim Industries Ltd. It is 'neutral' on Ambuja Cements and has a 'sell' on Nuvoco Vistas Corp.

Jefferies sees the performance of Indian cement companies likely recovering in the second half of the current fiscal, as its interaction with dealers suggests bottoming out of prices and better demand scenario.

However, the brokerage said it still remains selective and said that it prefers UltraTech Cement among large-caps. Its midcap pick is JK Cement.

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