The global broker is expecting broad-based and above-average demand growth of 9 per cent annually over FY21-23 and sees margins holding up on a two-year basis (despite a dip in FY22). It also raised FY23 earnings estimates up to 1 per cent, which is 4-5 per cent more than consensus.
“The cement industry is beginning a new cycle, and we advise playing the cycle rather than focusing on near-term cement price movements. We’d use share price volatility to accumulate select stocks,” said Gaurav Rateria and Mukund Sarawogi, equity analysts at Morgan Stanley.
The broker upgraded Grasim Industries to overweight, for which it has a target of Rs 1,700. It retained an overweight rating on Ambuja Cements and
with targets of Rs 360 and Rs 8,000, respectively.
At the same time, Morgan Stanley also downgraded Shree Cement to equal weight and ACC to underweight with respective targets of Rs 32,100 and Rs 1,950. The foreign brokerage also retained its underweight rating on Dalmia Bharat with target of Rs 1,300.
“With improving growth visibility, we see re-rating and premium widening versus peers for both Ultratech and Shree. We prefer Ultratech to Shree for valuation. We like Ambuja based on strong growth visibility and company-specific cost levers. We see potential narrative change for Grasim as the value of standalone businesses rises in total SOTP and capital allocation concerns are addressed,” said Rateria and Sarawogi.
The duo said their conviction on the industry stems from around 80 percent utilisations across India and regular price rise, meaning the industry has been passing cost inflation to customers.
Shares of cement companies have been on an uptrend, especially after the Union Budget allocated more for the infrastructure projects. Revival in residential house market has also made them more attractive but analysts believe the Street is also not pricing everything.
“We believe the Street is underestimating margin potential for cement stocks in FY23. We expect margins to surprise positively during the March 2022 and June 2022 quarters and drive earnings upgrades for FY23 over time,” said Morgan Stanley analysts.
The brokers said this cycle of growth for the cement companies is different from earlier cycles for multitude of reasons, including:
- Capacity addition is much slower
- Market share is more concentrated among the top 5
- New capacity additions are led by the top 5 players, which have gained good volume market share.
“We see limited room for irrational competitive behavior in most regions, although we are more constructive on the North, Central, and Gujarat markets vs. the South and East,” both analysts said in the note dated March 8.
