Cement industry volume may have grown in mid-single digit year-on-year in September, cement stocks such as Kakatiya Cement, Shiva Cement and Deccan Cement have rallied up to a whopping 239 per cent in the last one year. Experts believe the demand scenario is expected to improve in the second half of fiscal year 2017 on the back of higher government infra spend and pickup in rural housing post the normal monsoon, with cement stocks continuing to perform well.
"Newsflow on volumes and prices is expected to improve from November 2016 as construction activities resume post monsoon. We continue to maintain our positive stance on the sector on the back of improving utilisations/realisations/margins over the next few years," said brokerage ICICI Securities in a research note.
However, the rising prices of pet-coke may offset the already factored increase in cement prices for pan-India players and start hurting costs from the third quarter of FY17. Pet-coke prices have risen to $84/ton in October 2016 from $53/ton in Q1FY17.
"Given the large usage of pet-coke across companies, we expect substantial increase in fuel cost for most cement names. Rich valuations and risk to lofty earnings expectations for pan-India players keep our stock preference aligned to North-based players such as JK Cement and JK Lakshmi," said Kotak Institutional Equities.
Ultratech Cement, Shree Cement and The Ramco Cement remain ICICI Securities' top picks. The brokerage also likes Ambuja Cement and JK Laxmi Cement.
Meanwhile, all-India cement prices improved by Rs 3/bag month-on-month to Rs 332/bag in October 2016 led by price increases in West (+RS 24/bag m-o-m). Prices have increased by Rs 30-40/bag in West, North and Central markets over the past few months.
On the pricing front, brokerage Prabhudas Liladhar expects discipline to continue in North, Central and South regions, while prices are expected to improve in West and East as they are unsustainable at current levels.
"We reiterate our Overweight outlook on the sector on the back of robust demand outlook, slowing pace of capacity addition and exit of weak players. We continue to like ACC for the improved quality of operations, Heidelberg Cement on the back of attractive valuations and strong earnings outlook," said the brokerage.
On Monday, Ultratech Cement reported a 25 per cent growth in consolidated net profit at Rs 613.64 crore for the quarter ended September 30, 2016 on the back of lower expenses.
The flagship firm of the Aditya Birla Group had clocked a consolidated net profit of Rs 490.59 crore in the year-ago period.
The stock of Ultratech has added over 33 per cent in the last one year. Angel Broking maintains a 'neutral' rating on the stock.