Sectoral Update: Cement demand may grow at CAGR of 8% on back of improved valuations and outlook – know what brokerages say!

The cement sector in the previous week was one of the top sectoral gainers and the surge in the segment is likely to continue on the back of multiple factors on improved valuations, a domestic brokerage firm Motilal Oswal said in its report in the sectoral update.

The category’s valuations re-rated post-pandemic with a sharp pick-up in demand and slower pace of capacity additions on Covid-led disruptions, the brokerage said. “Initially demand was driven by rural and infrastructure segments, followed by a pick-up in urban housing and real estate.”

“Besides, favorable fuel prices, cost reduction initiatives, and improved realization drive significant improvement in profitability, that also helped cement players to deleverage their balance sheets.”

The brokerage is positive about the cement industry dynamics over the next few years due to better demand prospects led by the infrastructure and housing sectors, increased industry consolidation, and regulatory changes in the allotment of limestone blocks.

Motilal Oswal estimates a demand CAGR of around 8 per cent over the next three years, which is likely to surpass the installed capacity CAGR of 5.4 per cent. It prefers regions with favorable demand-supply situation and better pricing power such as North, Central, and to some extent West.

As per Motilal Oswal, “The industry sentiments, however, changed from H2FY22 due to multiple headwinds: Muted demand growth amid unseasonal rainfalls, sand mining ban, transporters strike in the eastern region, decline in cement prices; unabated cost inflation led by higher coal/petcoke prices.”

Owing to these, the sector valuation declined to 16.3x by May 2022 from its peak of 22.9x in October 2021, the brokerage added. While the segment’s current valuation stands at 19.3x EV/EBITDA, at an 18 per cent premium to its long-term average driven by better-than-expected profitability in 1QFY23.

The improved valuations in the April-June quarter were mainly on softening of fuel prices (petcoke price declined 14-34 per cent from its peak in April 2022) and anticipated recovery in demand post-monsoon season.