Brokerage sees up to 60% upside in cement stocks amid positive outlook and sustaining demand

A global investment banking firm HSBC sees and upside of up to 60 per cent in select cement stocks on the back positive outlook in the sector. Amid rising input cost, the sector needs to take aggressive price hikes to sustain margins and focus on profitability rather than market share, experts say.

Cement demand has been firming up with companies pushing for volumes to meet year-end targets despite headwinds including elevated input costs, labour unavailability, experts said.

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Maintaining a Buy rating, HSBC sees an upside of 59 per cent in Dalmia Bharat shares with target price of Rs 2430 per share, similarly it sees potential growth of almost 35 per cent in Ambuja Cement for a target or Rs 410 per share. The upside is in comparison to Friday’s closing price of stocks.

On Friday, Dalmia Bharat settled at Rs 1528 per share and Ambuja Cement closed at Rs 299 per share on the BSE.

The global brokerage firm sees a growth of around 13 per cent in Shree Cement with target of Rs 27700 per share as compared to its Friday’s closing of Rs 24535 per share on the BSE.

Domestic brokerage firm Nirmal Bang believe that input cost pressures are likely to sustain for a prolonged period compared to earlier expectations, demand is better while pricing power will make a comeback soon given the busy season. 

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins have likely bottomed out in Q3 of the financial year 2021-22 and despite further cost pressures, brokerage do not expect margins to fall substantially below those levels and sees improvement in pricing. 

Besides, softening in crude oil prices from all-time high US $130/bbl touched earlier last month, is also aiding the overall outlook of the sector. Bi product of crude oil is used in the manufacturing of cement, along with other raw materials like pet coke and coal, key ingredients in the process.

Coal or pet coke is a key input material for cement production as it constitutes around 30 per cent of total operating cost of cement, the brokerage said.