Nomura highlighted strong volume growth and reduced fuel costs in FY24.
Cement stocks soared on December 27 following an upgrade by Nomura on anticipated robust growth in sales volume, improved pricing discipline, and advancement of valuations to FY26.
The brokerage house upgraded Ultratech Cement, Dalmia Bharat, and Ramco Cement from ‘neutral’ to ‘buy’. Their one-year forward target prices have been revised to Rs 11,500, Rs 2,900, and Rs 1,250, respectively, indicating potential upsides of 15 percent, 32 percent, and 28 percent. It retained the ‘buy’ tag on Shree Cements but raised the target price to Rs 33,400 from Rs 27,800.
Shares of Ultratech Cement jumped to a fresh 52-week high of Rs 10,379.70 and gained nearly 3 percent, while Dalmia Bharat rose nearly 4 percent and Ramco Cement 3 percent. Shree Cement erased its morning gains and traded marginally lower around mid-day.
India’s cement industry showed robust volume growth of 17 percent year-on-year in the first half of FY24. The momentum is expected to persist in the second half, anticipating an 11 percent increase in sales volumes from the first half and a 13 percent year-on-year surge, Nomura said. It has revised its industry volume growth estimate to 12 percent for FY24, up from 8 percent earlier.
“For FY25, cement demand, in our view, is likely to moderate as infrastructure project launches typically slow down in the country in a general election year. However, the demand should remain higher than the past 10-year CAGR of 4 percent, largely due to the central government’s continued thrust on infrastructure, stable demand from rural and affordable housing and a pickup in urban housing. We expect a 5 percent CAGR in cement demand over FY24-26, but weak rural demand poses a downside risk,” Nomura said in its note.
Nomura highlighted strong volume growth and reduced fuel costs in FY24. Pet coke and thermal coal prices for FY24 dropped 35 percent and 45 percent year-to-date. Despite recent increases, spot prices remain significantly lower than the FY23 highs. Cement spreads have increased by Rs 300 per tonne in 3QFY24, based on a 90-day lagged fuel cost. Nomura expects an average unitary EBITDA improvement of Rs 200-250 per tonne in 3QFY24.
Even if fuel costs rise, the full impact will be seen from 2QFY25F. Nomura predicts an average unitary EBITDA expansion of Rs 150-200 per tonne in FY25 due to robust volume momentum, improved pricing discipline, and relatively lower costs.
Prakash Diwan notes that larger cement players (Ultratech Cement, ACC, Ambuja, and Dalmia Bharat) are gaining pricing power due to reduced raw material costs like coking coal and transportation. Favourable margins have been sustained due to lower crude oil prices over the past six months, except for recent disruptions in the Red Sea.
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Reports, like one from Nomura, have boosted enthusiasm in the sector, causing a surge in related cement stocks. With the housing sector contributing to 42 percent of India’s cement production and growing infrastructure projects, existing capacities are expected to be better utilised, signaling positive prospects for the industry, he added.
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