Cement demand has grown at 11% YTD v/s a modest 3% YoY growth in FY14. With capex cycle expected to recover, industry demand should grow at 7-9% CAGR for the next 3 years boosting utilization and pricing power. Further, with imported coal prices cooling off and crude prices trending downwards both fuel and freight inflation for the cement industry should moderate. Thus, industry margin should expand continuously over the next 2-3 years.
As per Karvy Stock Broking analysis of 17 cement companies, industry EBITDA declined Rs 265 a MT to Rs 675 in FY14. Increase in demand and moderating cost pressure should lead to Rs 200 a MT increase YoY during each of the next three years.
Stable cement prices across India during monsoon quarter, further price hikes getting effected across India (highest in south), low base of last year (industry EBITDA declined by 46% and 27% YoY in 2QFY14 and 3QFY14), next three quarters profitability will be very strong. Ramco Cements and India Cements would post strong EBITDA growths during the next 3 quarters v/s steady decline over the preceding 6-8 quarters in a row, the stock broker said.
Karvy said, "In our view, the cement industry is moving towards better days ahead led by firming up of demand outlook and moderating cost pressure. These should result in industry EBITDA CAGR of 30% over the next three years v/s 25% YoY decline in FY14E."
"Rising cement demand and prices would continue to drive consensus earnings upgrades going forward. In our view, on replacement cost basis, the stock valuations are still trading at discount to their last bull cycle period of FY06-10. This implies valuation multiples would continue to get re-rated over the next 1-2 years. We expect the mid-caps under our coverage to witness higher multiple re-ratings on account of their higher profit CAGR. While we remain bullish on the overall sector, our near term top-picks are ACC, JK Cement, India Cements and Mangalam Cements," it added.
