The cement sector has been in a downtrend in the last few months due to subdued demand and sluggish growth prospects. And the outlook is even bleaker owing to weak infrastructure spending and investments, according to analysts.
IDBI Capital expects the cement demand growth to surprise negatively in the coming months. “Better cement pricing will result in offsetting the impact of weak demand in H1FY20, however, sustained slowdown in cement demand will lead to lower pricing resulting in slower earnings progression than expected,” the brokerage said in a report.
“While pricing is key to profitability of cement companies, we believe that lower demand in H2 is likely to exert pressure on pricing resulting in weak earnings."
IDBI expects cement demand to contract in FY20 due to following reasons:
1) Infrastructure spending will be lower in FY20
2) The urban housing segment is unlikely to revive this year
3) Investments under PMAY are slowing down
4) Overall slowdown in consumption spending will likely weigh on IHB (Individual house building) segment.
Cement Stock Performance
In the large-cap cement space, the brokerage prefers only UltraTech Cement (Accumulate, TP Rs 4,501) as it can exhibit superior growth through inorganic acquisitions.
Another brokerage Credit Suisse said that the cement industry’s overall capacity utilization touched 70 percent in FY19, thought the key regions of south/north are still below 50/60 percent.
"The sector took a large price hike of Rs50-70 per bag in Feb-Mar-2019 in the face of weak demand and low capacity utilisation. This helped the sector report strong profitability in 1QFY20,” it said in a report.
Cement Capacity Utilisation
The brokerage has initiated ‘underperform’ rating on UltraTech (TP- Rs 3,400) and ‘neutral’ on ACC (TP- Rs 1,500) with a cautious view.