Construction Materials share price target

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).

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

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.

Demand in pre-election year FY24 has started on a strong note. Volume for our coverage universe is estimated to grow >15% YoY (in sync with industry). Yet, coverage EBITDA is expected to stay flat YoY owing to – a) muted cement prices (down 4-5% YoY, flattish QoQ) and b) marginal QoQ drop in fuel cost due to inventory-lag impact (major benefits expected in Q2/Q3 FY24E).

The recent outperformance in cement stocks tends to justify the street’s excitement about a ‘double-boost’ benefit expected from: a) strong underlying demand: up ~11% in FY23 with FY24 (pre-election year) off to a great start (Q1FY24 volumes likely to grow ~14-15% YoY).

Key Monitorables - Rural recovery; Higher price realization Top Picks from the Sector: Dalmia Bharat Ltd, JK Cements Ltd, Birla Corporation Ltd

As infrastructure spending ramps up, the Indian cement sector is seeing the rise of powerful new players with deep pockets. The recent acquisition of ACC and Ambuja Cements by Adani Group has put the cement industry on notice - this giant family conglomerate is coming after their business. The Adani Group's ambitious plans to double its capacity by FY28 have prompted major cement manufacturers to increase budgets and capex to protect their market share.