PremiumForeign brokerage house CLSA expects the recent price hikes taken by cement manufacturers to aid margin growth of the companies in FY22. Cement companies have taken consecutive price increases in March, April, and May. Consequently, all India prices of blended cement are currently 5-7% above 4QFY21, it said in its latest report on the sector.
According to CLSA, the sector's profitability outlook has improved post price increases.
It foresees industry Ebitda/tonne rising 3% year-on-year (y-o-y) in FY22. Ebitda is short for earnings before interest, tax, depreciation and amortization. By FY24, CLSA expects the industry profitability to be around 85% of profitability required for a greenfield project to break even.
That said, it cautions that some of the discretionary costs could return in FY22. Also higher commodity prices such as petroleum coke, coal and diesel are likely to lead to higher costs. Cash cost/tonne is expected to rise 4% y-o-y in FY22.
Despite FY21 being a challenging year, cement makers put up a decent show. For 4QFY21, volumes were up 15% sequentially and improved more than 25% y-o-y, while Ebitda/tonne was up 3% compared to the previous quarter.
In the near term, the impact of the second wave of covid infections remains a key risk for the sector, it said.
Going ahead, CLSA expects cement demand to grow 10% y-o-y in FY22 on a low base in FY21. "FY23 is likely to normalise before picking up again in FY24, which is a pre-election year. Rural independent home builders (IHB) and infrastructure are likely to be the key demand drivers in the near-term, with urban real estate likely to pick up with a lag," added the CLSA report. With that, the sector's capacity and utilisation levels are also poised to improve.
In spite of the positive, CLSA sees limited room for re-rating for cement stocks with sector vals above its five-year average. Among stocks, Dalmia Bharat Ltd and Ultratech Cement Ltd are its preferred picks.
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