Moneycontrol Bureau
Shares of UltraTech Cement, Ambuja Cements and Grasim Industries gained 1.5-2 percent intraday Wednesday as brokerage CLSA has retained its overweight rating on these stocks, saying these are top picks in the sector.
Notwithstanding monthly volatility, the brokerage expects a gradual cement demand recovery and model-in 7.5 percent CAGR over the next three years. Supply pressures, too, are receding, it said.
It believes that the worst is behind for the industry, which is on course for a gradual recovery after seven years of contraction in the utilisation rate.
According to the brokerage, stocks are currently trading above their historic multiples but this must be seen in the context of an ensuing upcycle, strong balance sheets, improving return on equity, etc.
The recent quarterly results (April-June quarter) highlighted significant regional contrast as south India-based cement players reported the highest unit EBITDA (earnings before interest, tax, depreciation and amortisation) despite lowest industry utilisation. On the other hand, north/central unit EBITDA fell to lows of several quarters despite much better utilisation.
This was largely due to producer discipline in the south while demand disappointment along with hyper competition impacted north/central pricing, it reasoned. According to CLSA, the east continued to witness good volume growth and resilient overall pricing, despite the entry of Shree Cement which sold at a discount to frontline brands.
Overall Q1FY16 aggregate cement EBITDA declined 10 percent Y-o-Y due to a fall in overall realisations.
Most companies have sounded a word of caution on near-term demand, given continuing weakness in macro and a sluggish trend in housing and infra.
However, the brokerage believes current pricing is almost unsustainable in the north and central, given abysmally low unit EBITDA. So it expects strong recovery in the near term.
Prices in south are also likely to be steady in the near term as industry utilisation rates are quite low, though, there may some corrections during the monsoon, it said.
Shares of Ambuja Cements closed at Rs 230.90, up 1.85 percent. UltraTech Cement rose 1.17 percent to Rs 3,170 and Grasim Industries was up 0.23 percent at Rs 3,715.20 on the Bombay Stock Exchange.Posted by Sunil Shankar Matkar
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