Fundamental picks by Reliance Securities: UltraTech Cement, JK Cement among top bets in cement sector
Cement industry has continued on its path of robust performance even as the demand has softened during the last quarter. The industry’s performance has improved mainly on account of better-than-expected reduction in operating costs mainly led by sharp fall in power and fuel costs, according to Reliance Securities. Companies under the coverage of the brokerage house reported an average sales volume growth of around 6 per cent on year-on-year basis. However, operating cost per tonne of cement companies declined by around 7 per cent year-on-year on account of 23 per cent decrease in power and fuel costs per tonne.
According to Reliance Securities, the fall in fuel costs are mainly due to an increased usage of petcoke by many companies along with low-cost petcoke inventory. However, average realisations stood flat on year-on-year basis, whereas it surged by around 4 per cent on quarter-on-quarter basis due to strong realisation recovery in Northern markets as companies like JK Lakshmi Cement and Shree Cement reported better sales growth.
Ramco Cements, Mangalam Cement, ACC and UltraTech saw maximum savings in operating cost per tonne in the range of around 8-17 per cent yoy owing to increased usage of petcoke and improving operating synergies. Shree Cement, UltraTech Cement and Ramco Cement reported a better-than-average EBITDA per tonne at Rs 1,262, Rs 1,039 and Rs 1,265, respectively due to their cost leadership. Reliance Securities expects the companies’ performance to remain healthy in ensuing quarter given the favourable pricing environment and price recovery in the Southern markets.
Buoyed by improvement in rural consumption due to favourable monsson and continued traction in roads and highway and other key infra segments, the growth is expected to be higher by 5-6 per cent in the ongoing financial year ending March 31, 2016. “The demand is expected to grow post monsoon in FY17E with pick-up in construction activities especially from projects pertaining to concrete road, urban infrastructure and irrigation,” Reliance Securities said in a report.
However, delay in demand recovery in Southern region will pose a challenge to the cement industry. However, incremental demand from proposed “Smart Cities” project and “Housing for All” scheme are key factors which may support the cement sector going forward. Reliance Industries is bullish on UltraTech Cement, JK Cement, Ramco Cements and Mangalam Cement.