Cement stocks in focus in Modi 3.0: Birla Corp, JK Cement could give 14-22% return

Cement prices were under pressure since the beginning of CY24 due to intense competition followed by demand slowdown. Industry players attempted price hikes in Apr-May’24; however, a major part of those hikes was reversed in a couple of days.

Resultantly, the all-India average price during Apr-May’24 was flat to marginally up (1%) vs. Mar’24-exit, while it was ~1% lower than 4QFY24 average.

After a muted growth in Apr’24, cement demand improved in May’24. We estimate cement volume to grow ~5-6% MoM in May’24.

Cement demand is estimated to be subdued in the near term due to the onset of monsoons in the next few weeks across markets. However, demand should rebound strongly in 2HFY25, supported by housing and infrastructure segments.

We estimate an industry volume growth of ~5-6% YoY in 1HFY25, followed by ~8-9% YoY growth in 2HFY25.Recently, the newly formed government announced the construction of an additional 30mn rural and urban houses under the Pradhan Mantri Awas Yojana.We believe this initiative is significantly positive for the cement industry as the government continues with its focus on affordable housing and development.In Jun’24, however, dealers have suggested that industry players have announced price hikes of INR8-10/bag across regions. In some markets (Rajasthan, Uttar Pradesh, and West India), non-trade prices have increased INR15-30/bag, thus narrowing the price gap between trade and non-trade.

We will monitor the sustainability of these price hikes though, given the onset of monsoon in the next few weeks across the country. In the eastern, western, and central regions, cement prices have risen INR10/bag in Jun’24.

Conversely, in the northern and southern markets, prices have risen INR8-9/bag during the month. Consequently, the all-India average cement price has increased ~3% MoM in Jun’24 (so far).

Considering the Jun’24 cement price hike; the all-India average cement price is estimated to be flat QoQ in 1QFY25 (QTD). Conversely, cement prices are estimated to be down in the northern, eastern, and southern regions in the range of ~1-2%.

Moreover, Domestic petcoke price declined 6% MoM to INR12, 439/t in Jun’24 and imported petcoke price was down ~3% MoM to USD107/t (on a spot basis).

However, imported coal (South African) price remained flat MoM at USD109/t. Based on spot prices, consumption costs stood at INR1.28/Kcal for imported petcoke and INR1.63/Kcal for imported coal.

Notably, spot price comes into the consumption play almost four to five months later, given the time taken in shipment and transit (including loading and unloading) of coal.

Hence, the benefit of a reduction in fuel prices is likely from 3QFY25 onwards. Industry players estimate a gradual reduction in fuel costs in the next few quarters, given the availability of fuel inventory.

JK Cement: Buy| LTP Rs 4328| Target Rs 5300| Upside 22%| Time 1 year

JKCE has shown strong volume growth, aided by capacity expansion and strong execution. The capacity expansion plan at Panna and grinding capacity is on track, which is likely to be commissioned in 2QFY26.

The management highlighted a potential cost reduction over the next two-three years to be driven by savings in logistics, power and fuel, and other fixed costs.

Birla Corporation: Buy| LTP Rs 1575| Target Rs 1800| Upside 14% | Time 1 year

The consolidated EBITDA and OPM surged. The Mukutban unit’s capacity utilization improved. Currently, BCORP is focusing on expanding the grinding capacity, while clinker expansion is likely by FY27.

The company expects state incentives for the Mukutban plant to accrue from the beginning of FY25. Operations at the Bikram coal mine are likely to commence from 2QFY25

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

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