Indian cement companies have underperformed over the past one year, and their financials have been hit due to a weak cement pricing environment and muted demand.
Analysts, however, now expect the sector to see a revival. Morgan Stanley says it is the right time to buy cement stocks, and JPMorgan has initiated coverage on five Indian cement firms as it sees consolidation in the sector.
Cement Pricing
The past year has seen a steady fall in Indian cement prices, with prices in the south, east and north regions of the country plunging to multi-year lows in August 2024.
While the industry did attempt price hikes in July and August 2024, it did not sustain due to the monsoon seasons.
Price hikes in September, however, were different. As per Nuvama, pan- India cement prices improved 2.5% month-on-month in September 2024, with partial of the hikes being sustained. As per the brokerage, October 2024 has again witnessed price hikes of Rs 15-20 per bag in the south region, which has sustained.
However, Morgan Stanley sees prices hikes being 'nominal' at best, in the next few years.
Demand Environment
Cement demand in Q2 FY25 was mainly impacted due to erratic monsoon, labour shortages and lower government spending on infrastructure projects. However, Morgan Stanley now sees green shoots of demand coming back.
Government capex will recover and grow 40% year on year post the monsoon season, according to JPMorgan. Furthermore, arithmetically, the government will have to spend more if it wants to meet its fiscal 2025 capex target of Rs 11.11 trillion.
In terms of medium term cement demand, JPMorgan states that the industry will get a boost from urbanisation and infrastructure projects. While fiscal constraints could limit the government spending, the brokerage cites the following drivers that could help demand:
Continued upcycle in real estate due to higher home affordability among consumer gas, leading to an acceleration in new homes.
Hopes of better rural incomes, and the launch of the government's new rural housing scheme could help demand.
Continued policy reference for infrastructure creation.
Top Cement Bets
JPMorgan initiated coverage on ACC Ltd. and UltraTech Cement Ltd. with an 'overweight' rating on Oct. 18. The target prices set at Rs 3,020 and Rs 13,750 per share, respectively, imply a 32% and 24% potential upside.
Nuvama has only two 'buy' recommendations in the cement space— ACC and JK Cement Ltd. The target prices of the two companies stand at Rs 2,946 and Rs 5,123 per share. These imply a 28% and 20% potential upside, respectively.
Morgan Stanley says that UltraTech Cement and Ambuja Cements are the best cement plays.
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