Here is why these four cement stocks look attractive; do you own any?

Four cement stocks are top picks as international pet-coke prices have plunged by over 50% from their peak levels which indicates a good sign as experts believe this would drive EBITDA per tonne in the first half of FY24. These cement stocks are Ultratech Cement, Shree Cement, JK Cement, and JK Lakshmi Cement.

In its note dated May 16, analysts Krupal Maniar, Harshal Milan Mehta, and Kartik Bhandari at Antique Stock Broking said, "Our channel checks suggest industry demand likely remained strong in Apr’23 and grew in high single digit YoY; while current average pan-India prices are broadly flat vs Mar’23 exit. Imported fuel prices corrected further by ~10% MoM in May’23 till date and are now down >50% from their peak."

According to the analysts' note, the benefit of a 10% fall in fuel prices is equivalent to a ~2% price hike on EBITDA.

International petroleum coke prices have tumbled by over 50% from their peak and are down by 25% since March 2023 to $125-130.

On the domestic front, pet-coke (RIL) is down by 35% from its peak levels and lower by 20% since March 2023 to ₹14,639 in May month so far. Analysts expect this to record further correction in June month.

Also, all grades of imported coal prices are down by over 50%. For example, South African 6000 NAR CFR prices (of $125) fell below Russian coal of similar grade (at $130) first-time post-Russia-Ukraine war.

Read here: Bharti Airtel share price surges after Q4 numbers: here are 5 reasons why

Brokerage's analysts expect average fuel cost to slide below ₹1.9 / kcal (spot) versus ₹2.3 / kcal in Q4 translating into a benefit of ₹250-300/ton likely to be reflected in H1FY24.

Also, they expect the average EBITDA for the cement industry to rise by over ₹150/ton QoQ in Q1FY24 (almost flat YoY after seven quarters of YoY decline) and may not substantially fall

QoQ in Q2FY24 as a benefit from lower fuel prices may partially offset negative operating leverage and lower prices, if any.

Thereby, the analysts note said, "We expect EBITDA/ton of companies under our coverage to increase by (50%) ₹400/ton from ₹800/ton in FY23E to ₹1,200/ton in FY25E led lower fuel costs, better cost efficiencies and higher realizations. Key risks include lower demand/price and higher cost escalations."

In regards to cement stocks, the note said, "while near-term stock performance could remain range-bound as we enter seasonally weak monsoon period, we believe risk-reward remains favorable in the medium term, as earnings may surprise led by lower costs and increased consolidation.

Read here: Tata Motors DVR share price soars on dividend news: What are DVR stocks?

Further, it added, "We reiterate our positive stance on the sector. Ultratec Cement and Shree Cement are our top picks. We also like JK Cement and JK Lakshmi Cement."

Hence, the brokerage has recommended buy on these stocks with the following target price:

- Ultratech Cement: Target price set at ₹8900 apiece.

- Shree Cement: Target price at ₹28,000 apiece.

- JK Cement: Target price at ₹3,220 apiece.

- JK Lakshmi Cement: Target price at ₹910 apiece.

On Wednesday, in the opening bell, at the time of writing, Ultratech Cement stock traded by ₹40.10 or 0.52% to ₹7,732.85 apiece, while Shree Cement traded at ₹24,513.20 apiece higher by ₹75.95 or 0.31%. JK Cement was up by 0.4% to ₹3,060.40 apiece, and JK Lakshmi Cement inched up to trade at ₹799.05 apiece.

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.