Shares of cement companies witnessed some buying on Thursday, in an otherwise weak broader market, as investors nibbled on beaten-down heavyweights amid improving demand outlook. Shares of major cement manufacturers ACC, Ambuja Cements, Ultratech Cement, Shree Cement and India Cement rose up to 1% intraday, after falling around 4% in the last five trading session. In comparison, the BSE benchmark Sensex dropped 0.9% intraday, while it slipped 0.3% in a week.

Cement stocks have been largely ignored by investors compared to other sectors due to rising cost pressure in the backdrop of a sharp spike in coal and crude oil prices, which are key ingredients. Even, the industry failed to cash in on the rise in cement prices as high input costs played spoilsport for cement companies. The cement players raised the prices of cement by ₹10-40 per bag in October across India and further by ₹15-20 a bag during the March quarter to offset a sudden jump in raw material costs following the Russia-Ukraine conflict.

With the Russia-Ukraine crisis showing no signs of ebbing, investors fear that the prices of global commodities would hit further high as the U.S. and its western allies are mulling to impose further harsh sanctions on Russian oil.

Analysts see demand improving; prices to follow

Domestic brokerage firm ICICI Securities expects cement demand to improve in March, notching 17-18% growth on a month-on-month basis and low-single-digit on an annual basis. The agency has recommended UltraTech Cement (UTCEM), Ambuja Cement (ACEM) and Shree Cement (SRCM) as its top stock picks to buy from the cement sector.

“As per our channel checks, demand seems to be improving in March 2022 and may see greater than 17-18% MoM and low-single digit YoY growth after having declined marginally YoY for the past three months. Industry may post highest-ever volumes in March 2022 (approximately 38 million tonnes) with 91% utilisation despite the high base of March 2021, in our view,” ICICI Securities said in a report dated March 23.

“We believe Q1FY23E may see stronger 10-15% YoY demand growth aided by low-base of Q1FY22 impacted by second Covid wave,” it added.

The report noted that current average fuel prices, which are still around 30% higher than Q3FY22 fuel consumption rate, may impact June quarter earnings (Q1FY23). It expects retail prices of cement to rise by ₹40 per bag during April-June quarter, which remains a key trigger for the sector. Average cement prices witnessed a marginal improvement of 2% in March, on a monthly basis.

Another brokerage firm, JM Financials expects the cement industry to hike prices in April as companies prioritise profitability in the beginning of a new fiscal. “Overall manufacturing costs are likely to be up by ₹450-500 per tonne as companies will realise complete impact of higher commodity price. We expect the costs to witness a flat to marginally higher in 4Q on a sequential basis,” it said.

“Every $10 increase in coal/pet-coke increases cost of cement by ₹50-60 per tonne,” it added.

Meanwhile, India Ratings and Research (Ind-Ra) expects that the government’s continued focus on infrastructure development and the resultant increase in the capital expenditure budget is likely to boost cement demand in FY23. The strong cement demand from the housing segment, road construction, and rural infrastructure augur well for the sector.

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