Construction Materials share price target

Channel checks have yet again assumed huge importance given the surprise price surge in East India (announcement of INR 70/bag since the start of Sept’23). Our interaction with several sector experts and intermediaries across regions, over the past few days, point towards an improving cement price scenario.

The EXIM data for the month of Jul’23 has been a mixed bag. Tile exports stood at 55.6 MSM growing substantially by 41.5% YoY / 52.5% MoM with GCC countries (~17%), Iraq (~7%) and USA (~6%) being the top export destinations. Tile exports remain robust due to lower freight rates and a significant decline in gas costs. As per industry participants, tile exports are expected to remain healthy in the near term too.

As part of our channel checks, we interacted with a few senior marketing personnel – including an industry expert – in the southern states of Tamil Nadu and Kerala. Key takeaways are: 1) race for leadership position is driving up competitive intensity in the region; 2) Andhra players have been marginalised due to un-remunerative prices; 3) demand outlook remains positive on the back of infra push even as uncertainty looms over pricing.

Even as cement prices stand weak (since Q2FY23 till date), the street found solace in the plunging global fuel costs, hoping it will stay low and drive-up EBITDA margins. However, the recent rebound in global fuel rates (petcoke up 23% and thermal coal up 16% from the bottom of mid-July’23) could challenge the hypothesis (our savings expectations have been reduced from INR 350/te to INR 270/te).

Top Sector Ideas - Cement

On the face of it, the acquisition of Sanghi Industries (SIL) by Ambuja Cements (ACEM) comes across as industry consolidation. However, we view it as a catalyst to start price war in West India given – a) SIL’s sales volumes stand at just 2-2.5mn tonnes p.a. as against cement capacity of 6.1mtpa and clinker capacity of 6.6mtpa; b) with Adani Group’s expertise in port logistics and ACEM’s strong brand presence in West India, we see huge scope for ACEM to run SIL units at optimal capacity.

On the face of it, the acquisition of Sanghi Industries (SIL) by Ambuja Cements (ACEM) comes across as industry consolidation. However, we view it as a catalyst to start price war in West India given – a) SIL’s sales volumes stand at just 2-2.5mn tonnes p.a. as against cement capacity of 6.1mtpa and clinker capacity of 6.6mtpa; b) with Adani
Group’s expertise in port logistics and ACEM’s strong brand presence in West India, we see huge scope for ACEM to run SIL units at optimal capacity.

Contrary to Street’s expectations, Q1FY24 results for cement companies, under our coverage, have largely disappointed with QoQ drop in EBITDA/t. Hereon, we highlight the risks of – a) likeliness of Q2FY24 EBITDA/t taking a further dip (owing to low operating leverage and cement price weakness); b) caution against assuming Q2FY24 prices as the bottom (historically, prices have dipped QoQ in Q3 and Q4 as well).

Building material companies under our coverage are expected to report a mixed quarter (Q1FY24E) YoY with pipes and ceramics seeing healthy operational performance aided by lower raw material prices and tepid base whereas woodpanel companies may see continued margin pressure due to higher raw material cost.

TOP RESULT PICK: UltraTech Cement, Ambuja Cement, Dalmia Bharat, Birla Corporation, JK Lakshmi, Star Cement