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Cement stock outlook: Cement stocks hover at 52-week highs. Will this momentum stay?

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Mumbai: Shares of cement manufacturers are ruling near their 52-week highs, but analysts are still upbeat on the pack, given the robust earnings reported for the September quarter, and signs of pickup in construction activity in the rural areas.

A number of stocks such as ACC, Ambuja Cements, Ultratech Cement, The India Cements, JK Cement, Deccan Cements and Sagar Cements have scaled 52-week highs this month, having risen between 20 per cent and 108 per cent for the year to date, compared with a 7 per cent gain seen in the Sensex in the same period.

Jiten Parmar, partner at Aurum Capital, says from a 2-3 year horizon, capacity utilization will keep on increasing for cement companies. He said most companies surprised with a volume uptick in the September quarter amid good rural demand.

Blockbuster Q2 report cards

The 14 listed cement companies, which comprise 67 per cent of the overall capacity, reported consolidated volume growth of 5 per cent year on year in the September quarter, led by sustained demand in rural areas and a gradual pickup in the infrastructure segment besides improved labour availability.

A low-cost petcoke inventory and strong measures to control fixed costs helped companies report better-than-expected profitability.

“The key industry metric of ebitda per tonne hit a record high for many of the cement firms. Selling prices were firm, input costs were lower, and that resulted in excellent profit margins for these companies. That helped this pack to surge,” Parmar said.

In a report dated November 18, JM financial said the ebitda per tonne stood better with 33 per cent YoY growth, amid a 2.5 per cent year-on-year improvement in realisations complemented by benign commodity prices, negotiation with third-party contractors, control on discretionary spend such as travel, advertisement, marketing, and the likes, and favourable operating leverage.

Vinit Sambre, Head of Equities at DSP Mutual Fund, said cement stocks are a better option to play on infrastructure spend and growth is coming back to the cement business because they are more diversified in terms of their mix.

“If infrastructure grows, anyways cement firms will see see good demand. Even if the sector is dull for a period, the cement companies would still see demand from individual housing and other areas,” Sambre said in an interaction with ETNow on November 20.

Where is valuation looking attractive?

Parmar of Aurum Capital said a number of midcap and smallcap cement firms are trading at decent valuations. “We like JK Lakshmi Cement. The stock has a long way to go, if you compare it with its largecap peers. There is a lot of room for Ebitda/tonne to expand. In the Andhra Pradesh-Telangana region, Deccan Cements is one of our favorites, as it has fantastic Q2 numbers, and looks very juicy from a valuation perspective,” he said and clarified that his company owned and recommended these shares to clients.

Sandip Sabharwal, founder of asksandhipsabharwal.com, said his company has been holding on to UltraTech for a very long time.

“The good thing going for UltraTech is that it acquired capacities from Century and Jaypee at the right time and at right valuations. They have been able to repay the debt they took for those acquisitions very fast. Cash flow generation in the first half of the year itself has been more than Rs 10,000 crore and that is the strength of UltraTech,” he told ETNow on November 20

India Cement is the other stock, where there is absolute deep value and there could a possibility for some inorganic acquisition. “This stock has been doing well lately, but it trades below its intrinsic value. At some point of time, that will also be realised,” he said.

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