How to play cement stocks post ACC, Ambuja Cements, UltraTech Cement March quarter earnings?

Cement manufacturers ACC, Ambuja Cements and UltraTech Cement reported mixed sets of numbers for the recent January-March quarter with a decent rise in volume amid easing cost pressure.

The year so far has been mixed for cement stocks. Shares of Adani Group firms ACC (down 28 per cent) and Ambuja Cements (down 26 per cent) are down significantly this year so far because of the selloff after the Adani-Hindenburg saga. Shares of Birla-owned UltraTech Cement (up 8 per cent), on the other hand, have significantly outperformed Nifty (up 1 per cent) this year so far.

The cement space is a tricky one for investors. However, as it is an integral part of the infrastructure theme, analysts and brokerage firms see them as decent bets. Having said that, they add that one needs to be stock-specific in the sector and avoid taking blind bets on each stock.

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ACC Q1CY23 numbers

ACC reported a 40.5 per cent decline in consolidated net profit to ₹235.63 crore for the March quarter of the calendar year 2023 (CY23). This was against a net profit of ₹396.61 crore in the corresponding quarter last fiscal.

The revenue from operations rose by 8.2 per cent to ₹4,790.9 crore for the quarter under review as compared to ₹4,425.54 crore in the year-ago period.

Ambuja Cements Q1CY23 numbers

Ambuja Cements reported a 1.6 per cent rise in net profit at ₹502.4 crore for the March quarter as compared to ₹494.4 crore in the corresponding quarter last year.

The revenue of the Adani Group firm saw an 8.4 per cent increase to ₹4,256.3 crore during the March quarter as compared to ₹3,926.7 crore in the same period of last year.

Ultratech Cement Q4FY23 numbers

Ultratech Cement reported a net profit of ₹1,666 crore for the quarter ended 31 March, down 32.3 per cent from ₹2,460.51 crore posted in the same period a year earlier.

Its consolidated net sales for Q4FY23 rose to ₹18,436 crore, up 19 per cent from ₹15,557 crore in the same quarter of the previous financial year.

Brokerage views on ACC

Brokerage firm Motilal Oswal Financial Services has a 'neutral' view on ACC with a target price of ₹1,990.

Motilal Oswal said ACC’s growth plans and its cost-saving initiatives will be the key monitorable. It added that there is still a lack of clarity regarding the commissioning of the UP grinding unit.

Besides, the brokerage firm highlighted even though the cash balance of the company has improved sequentially, it has significantly dropped from last year ( ₹3,110 crore versus ₹7,400 crore in December 2021). As per the brokerage firm, apart from pressure on profitability, a rise in other current assets (advance for coal) led to a decline in cash balance.

Brokerage firm Nirmal Bang has an 'accumulate' view on ACC with a target price of ₹1,912.

The brokerage firm said ACC reported volume in line with its estimate, but despite a brief closure of the HP units, realization per tonne came in better than expected.

"ACC will benefit from increased volume growth, reduced raw material costs and a more effective pricing strategy (maintaining its position in the ‘A’ category price band in important markets) now that the HP unit transport strike has been resolved," said Nirmal Bang.

Brokerage views on Ambuja Cements

Brokerage firm Motilal Oswal Financial Services has a 'neutral' call on Ambuja Cements with a target price of ₹390.

Motilal said Ambuja and ACC (Adani Group entities) are net cash-positive companies, with a consolidated cash balance of ₹11,500 crore as of Mar’23. Cash reserves, along with the remaining proceeds from warrants, will support their capex plans.

However, the brokerage firm added that better clarity is needed on capex as the company has yet not placed orders for equipment.

"We believe that organic expansions will need more time and we have not considered significant expansions in our estimates," Motilal Oswal said.

On the other hand, brokerage firm Nirmal Bang has a 'buy' call on Ambuja Cements with a target price of ₹496. It said Ambuja Cements' numbers were consistent with its projections.

Nirmal Bang said Ambuja is the net beneficiary of the numerous measures implemented to enhance operational efficiencies via ACC.

"The company's strong brand equity in the retail industry, cost-reduction and product-enhancement initiatives are all commendable," said Nirmal Bang.

Brokerage views on UltraTech Cement

Motilal Oswal Financial Services has a 'buy' call on UltraTech Cement stock with a target price of ₹8,600.

Motilal expects UltraTech's consolidated volume to report a nearly 8 per cent CAGR over FY23-25 and its EBITDA/t at ₹1,175 and ₹1,250 in FY24E and FY25E, respectively, versus EBITDA/t of ₹1,005 in FY23.

"UltraTech has been generating strong cash flows and we estimate cumulative OCF/FCF to be at ₹23800 crore/ ₹12100 crore over FY24-25. We estimate the company to become net cash positive in FY24," said Motilal Oswal.

Nirmal Bang, too, has a 'buy' call on UltraTech Cement with a target price of ₹9,795 as it said the results were in line with estimates.

"Post Q4FY23, our pricing estimates for Ultratech have not changed. We remain positive about the company’s focus on the core cement business, its sheer size, ambitious expansion plans, performance delivery and strong balance sheet," said Nirmal Bang.

How to play cement stocks?

Analysts appear positive about the cement sector but underscore that the stocks may remain volatile in the short term because of market uncertainty.

Arun Agarwal, Vice President at Kotak Securities pointed out that in Q4FY23, UltraTech Cement delivered strong volume growth YoY and a sequential increase in EBITDA/ton.

He said UltraTech’s expansion projects ensure headroom for growth.

Agarwal further said Ambuja Cements reported volume growth YoY and QoQ in Q4FY23 and the company is working on multiple expansion projects.

Agarwal expects cement companies' margins to improve going forward.

"In FY24E, cement players' margins will likely receive support from lower energy costs and operating leverage benefits from healthy volumes," said Agarwal.

Aamar Deo Singh, Head Advisory at Angel One has similar views.

Singh said the cement sector has witnessed a significant increase in total volume production in Q4, with declining cost pressure. However, on the revenue side, prices are likely to remain under pressure till monsoon, post which prices are expected to firm up once construction activity revives post monsoon.

"Ambuja and ACC have corrected by over 35 per cent from the recent tops, whereas Ultratech is down only 10 per cent. It appears that investors are adopting a cautious approach after the selloff that happened post the Hindenburg report but overall the sector is a key infrastructure one, holds great promise in coming years," said Singh.

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.