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ICICI Direct Report
The cement sector is likely to witness a glut of new supplies over the next three to four years (i.e. at 7.2% compound annual growth rate) based on the recent capex plan announced by major cement companies.
Assuming some delays, we still expect supply CAGR of 6-6.5% versus historical average of 4.4%. This would lead to fresh rounds of consolidation especially in the mid and small sized cement players having high cost structure/bloated balance sheet.
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The near-term cost headwinds have already pressurised margins as player are unable to pass on the cost pressure due to moderation in demand in the wake of higher inflation. This has led to cement sector underperforming broader markets.
While long-term demand is expected to stay heathy, we believe, the recent stock price correction offers a good entry point to accumulate quality companies having healthy balance sheet and sustained long-term growth visibility despite near-term challenges.
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