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Cement outlook: CLSA expects better margins on price hike, demand recovery

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Among stocks, Dalmia Bharat Ltd and Ultratech Cement Ltd remain CLSA’s preferred picks, while it upgraded ACC to Outperform from Underperform.

Cement outlook: CLSA expects better margins on price hike, demand recovery
Brokerage firm CLSA sees profit margins improving in the cement sector in the near term. The reason: first, the sector is seeing a recovery in demand after a muted April and May owing to the second wave of COVID-19; and second, manufacturers raising cement prices.
The brokerage expects industry Ebitda/tonne to rise 3 percent YoY in FY22 and shows a 5 percent CAGR over FY21-24CL. By FY24, it expects industry profitability to be 85 percent required for a greenfield project to break even.
CLSA expects cement sector Ebitda (earnings before interest, tax, depreciation and amortization) to show 15 percent CAGR over FY21-24, driven by volume growth of 9 percent and profitability of 5 percent. Consequently, it expects utilisation to rise to 71 percent by FY24.
The brokerage, however, also expects some of the discretionary costs to return in FY22. Also, higher commodity prices (pet coke, coal and diesel) are likely to lead to higher costs. Cash cost/t is estimated to rise 4 percent YoY in FY22.
“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,” CLSA said in a report.
Among key risks in the near term, the impact of the second wave of covid infections remains for the sector, it added.
CLSA believes that the cement companies offer limited room for re-rating with sector valuations above its five-year average.
Among stocks, Dalmia Bharat Ltd and Ultratech Cement Ltd remain CLSA’s preferred picks, while it upgraded ACC to Outperform from Underperform.
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