Following a mixed performance in the June quarter (Q1FY25) for cement companies, Axis Securities has identified UltraTech Cement, JK Cement, and Dalmia Bharat as its top picks in the sector.
Axis Securities reported that the cement companies covered in its review experienced a year-on-year (YoY) decline in revenue, EBITDA, and adjusted profit after tax (APAT) by 1 percent, 4 percent, and 9 percent, respectively. These results fell short of expectations which were for a 0 percent growth in revenue, a 7 percent growth in EBITDA, and a 4 percent increase in APAT. Volume growth for the quarter aligned with expectations, showing a 5 percent increase.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins were down by 50 basis points (bps) YoY, primarily due to lower realisation per tonne, though mitigated by reduced costs. On a quarter-on-quarter (QoQ) basis, EBITDA margins fell by 290 bps as realisation per tonne decreased by 3 percent to ₹5,343. The EBITDA per tonne for the quarter was ₹816, reflecting an 18 percent decline QoQ and 6 percent YoY.
The report highlighted that realisation per tonne decreased by 3 percent QoQ and 5 percent YoY to ₹5,343, as cement prices fell across most regions. Conversely, cost per tonne stood at ₹4,531, down 5 percent YoY but flat QoQ, with power and fuel costs easing by 23 percent to ₹1,041 per tonne.
Performance among the companies in Axis’ coverage was varied. JK Cement reported better-than-expected results, while Birla Corp, Ambuja Cement, ACC, and Heidelberg Cement fell short of expectations. No new capacities were announced during the quarter. However, UltraTech Cement, Dalmia Bharat, Shree Cement, and JK Cement did commission new capacities of 8 million tonnes per annum (mtpa), 2 mtpa, 3 mtpa, and 2 mtpa, respectively. Existing announced capacities are progressing as planned.
Axis Securities noted that the softness in cement prices is expected to continue until Q2FY25 due to subdued demand and increased competitive intensity, which is putting pressure on pricing. The industry is seeing consolidation, which is influencing pricing strategies.
UltraTech Cement: The brokerage has a ‘buy’ call on the cement stock with a target price of ₹12,400, implying an upside of 10 percent.
In Q1FY25, the company achieved strong capacity utilisation of 85% and a 7% year-on-year volume growth. It expanded its grinding capacity to 149.5 mtpa and plans further increases, targeting a total capacity of 183.5 mtpa by FY27. This expansion is expected to boost its market share from 25% to 28% and drive an 11% CAGR in volume over FY24-26, said the brokerage. With anticipated cost reductions of ₹200-300 per tonne and a projected EBITDA margin rise to 21% by FY26, the company is well-positioned for increased profitability. Cement demand is projected to grow at 8-9% CAGR over FY23-26, supported by infrastructure investment and strong real estate demand, it added.
JK Cement: The brokerage has a ‘buy’ call on the stock with a target price of 4,920, indicating an upside of 16 percent.
As per the brokerage, the company’s ongoing 6 mtpa capacity expansion will boost its total grey cement capacity to 30 mtpa, achieving a 13% CAGR growth from FY23-FY26. This expansion is expected to drive a 13% CAGR in volume over the same period. In the recent quarter, EBITDA margins were stable, supported by increased volume and reduced power and fuel costs, which fell 22% YoY, it said. The company anticipates cost savings of ₹150-200 per tonne in the next two years, with projected EBITDA margins of 18%-20% and EBITDA/tonne of ₹1,050-1,180 for FY25E/FY26E. Overall, the company is expected to grow its volume, revenue, EBITDA, and APAT at CAGRs of 13%, 13%, 29%, and 40% respectively over FY23-FY26E, forecasted the brokerage.
Dalmia Bharat: The brokerage has a ‘buy’ call on the stock with a target price of 2,120, indicating an upside of 21 percent.
The company’s cement grinding capacity is set to increase to 49.5 mtpa in FY25E from 46.6 mtpa, which will support a projected 9% CAGR in volume growth over FY24-26E, noted the brokerage. With current capacity utilisation at 66%, there is ample room for growth. The company’s operating cost per tonne decreased by 4% QoQ and 7% YoY to ₹3,989, boosting its EBITDA margin by 170 bps YoY and 330 bps QoQ. Expected improvements in operating efficiency, premium product sales, and stable realisations should enhance EBITDA margins to 19% by FY26E, it predicted. As large players’ market share rises from 46% to 55%, the company, a top 5 player, is poised to benefit from consolidation, better pricing, and increased economies of scale, added the brokerage.
Despite a challenging quarter, Axis Securities remains positive on UltraTech Cement, JK Cement, and Dalmia Bharat, highlighting their strong performance and strategic capacity expansions. The ongoing price pressures and competitive landscape are anticipated to persist in the near term, influencing the sector’s dynamics as it adapts to current market conditions.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
