Cement is among the few sectors to benefit from the budget. Though there weren’t any specific proposals for it, the thrust given to infra spending is a big plus for the industry.
The proposal to develop 100 new satellite towns, 16 new ports and the spending for rural infrastructure should benefit cement manufacturers. After last year’s stunted demand growth of 3 per cent, the coming years should be much better for players.
But with most cement stocks having run up sharply this year investors may be better off betting on larger cement players. In this category, UltraTech Cement seems a good buy.
Being the single largest cement manufacturer in the country with a pan-India presence, UltraTech is well-poised to benefit from a revival in the infra and housing sectors in the coming years.
From the previous ‘buy’ recommendation in August last year, the stock is up 50 per cent. At ₹2,492 now, it discounts its estimated earnings for 2015-16 by 20 times. In the last five years, it has traded in the price band of 15-24 times. However, given the strong potential for earnings growth, investors with a long-term perspective can buy the stock and keep accumulating it on declines.
In 2013-14, UltraTech reported sales growth of just 1.3 per cent, while its profit declined 18 per cent on cost pressures. Things should turn around over this year and the next.
Revival on the cards
After a lacklustre 2013-14, many pockets across the country have seen improved cement demand in the last three months — a delayed monsoon and higher retail demand have contributed to this. This is also reflected in the 7.5 per cent rise in cement production in April-May compared with the same time last year. The momentum is expected to continue.
The next two years may see the cement industry revive. If the measures announced in the recent Budget drive investments into infrastructure projects, all-India cement consumption may rise by at least 7-8 per cent in 2015-16.
The allocation of ₹37,000 crore for roads, airports in tier II/III cities, new ports and the boost to housing should help. Also, in the South, the new infra projects in Telangana and Seemandhra should lift cement demand.
This, along with the slowing addition in new capacities in the next two years (20 mtpa in 2014-15 and 15 mtpa in 2015-16), should improve the cement industry’s capacity utilisation.
From the current 68-70 per cent, the industry’s capacity utilisation may rise to 75 per cent in 2015-16. This should restore pricing power to the cement sector.
Revenue to grow
UltraTech added nearly six mtpa capacity last year. These new capacities along with a large distribution network and presence in tier II/III cities will help now. Sales growth for the company will also be buttressed by better realisations. As demand gathers momentum and capacity utilisation improves, cement prices are expected to rise.
In the last two months, cement prices have already increased to the tune of 5-12 per cent.
In June, prices averaged at about ₹310/50 kg bag in the North, ₹340 in the East and ₹320 in the South and West. If demand improves, sustaining and growing these price levels should not be a challenge.
Margins to improve
In the March 2014 quarter, UltraTech’s operating margin stood at 21.8 per cent, better than the 16.7 per cent in the December 2013 quarter, but lower over the same period last year by almost two percentage points.
An increase in raw material costs, higher fuel and transportation costs combined with weak realisations hit profitability.
Cost pressures may continue for cement players, including UltraTech, given higher freight charges after the recent hike in rail freight charges and rising diesel prices.
However, going forward, margins should improve. Better pricing power and higher capacity utilisation may see realisations grow faster than costs.
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