What's next for cement stocks? Axis Securities decodes key reasons; bets on Dalmia Bharat, JK Cements and Birla Corp

According to Axis Securities, the cement demand is likely to remain robust on account of higher government spending on infra, housing, and residential, higher demand for commercial real estate and improving rural demand.

The brokerage firm highlighted that higher cost of power/fuel remained the key concern for cement companies in FY23 as they could not pass on cost inflation. However, with softening prices of Pet Coke and Imported Coal by over 40-60% in the last six months, the benefit of lower fuel prices will start flowing in from the first quarter of FY24 as most of the companies were carrying high-cost inventory.

What Makes the Cement Sector a Good Bet?

The brokerage firm said that diesel prices are stable and it remains positive on the cement sector as demand drivers are intact. It expects cement demand to grow at a CAGR of 9% over FY23-FY25. Despite companies adding capacities, we believe that cement demand will outpace the cement supply, it said.

Top Picks Ideas from the Sector

Axis Securities is betting on Dalmia Bharat, JK Cements and Birla Corp from the cement space. Here's why the brokerage firm is bullish on these counters:

JK Cements

Rating: Buy | Target Price: Rs 3,560 | Upside: 5%

Axis Securities expects the company to report an EBITDA margin of 18% in FY24 from the current 13%, driven by higher volume, stable realization, and lower cost.

"Softening fuel prices bode well for the industry and the company tends to benefit on account of a reduction in fuel cost Power/fuel cost is expected to reduce by Rs 250-Rs 300 on a per tonne basis in FY24. Furthermore, the operating costs of new units are expected to normalize as utilization further improves in FY24, which will drive the EBITDA margins of the company moving ahead," it said.

It further added that the company recently expanded its grey cement capacity by 4 mtpa in the demand-accretive central India region which has turned EBITDA positive with 60% capacity utilization. Moreover, it has also added another 2 mtpa capacity by debottlenecking existing plants and has thereby increased its total grey cement. capacity to 20.7 mtpa. This is expected to drive the company’s volume growth in FY24.

Birla Corporation

Rating: Buy | Target Price: Rs 1,300 | Upside: 9%

The company’s volume growth in FY23 stood at 11% and we expect the growth momentum to continue in FY24E/FY25E as well. It is working on further improving Mukutban capacity utilization and realization. It has also expanded its footprint in nearby markets of Telangana, Madhya Pradesh, and Gujarat to capitalize on new growth opportunities that are being driven by robust investments in infrastructure.

Axis Securities expects the company to post volume growth of 9% CAGR over FY22-25E. "To mitigate the cost pressure, the company has optimized its fuel consumption mix. Moreover, the softening of fuel prices, increasing contribution from WHRS and AFRs, higher sales of blended and premium products from the Mukutban Unit and other cost savings through internal efficiencies are expected to drive EBITDA/tonne of the company," it said.

Dalmia Bharat

The brokerage firm expects the company to further consolidate its market position in the region. The cement demand in North East and East India region is expected to remain resilient and grow in double digits moving ahead.

"The company’s organic capacity expansion plan is progressing well. Its total cement grinding capacity will increase to 46.6 mtpa in FY24E from the current 41.1mtpa excluding JP Associates assets, thereby aiding its volume growth. A higher blending ratio and increase in the sale of premium products along with softening in commodity prices will aid higher EBITDA margins going forward. Setting up of WHRS plant/Solar energy plant will enable the company to reduce power/fuel cost as well," said Axis Securities.

It expects the company to report an EBITDA margin of 21% and 22% respectively in FY24E and FY25 from the current 17% driven by higher volume, better realization, and cost optimization initiatives.

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