Which cement stock you should buy? Pricing to GST rate cuts - Here's what CLSA says

The cement stocks have witnessed a rebound after the bearish sentiment last year. Rating agency CLSA on Wednesday, stated that, cement stocks are up 10-30%YTD (vs +10% for Nifty) led by cement pricing rebound. Not only that factors such as strong demand, stable government and lower inputs are also helping. 4QFY19 was the sixth consecutive quarter of double-digit volume growth. While realisations missed forecasts, lower costs helped. This drastic improvement indicates that, cement stocks are getting back on track. 

CLSA in its research note highlighted four factors that will play major role for cement stocks ahead! 

1. Continued volume growth momentum!

Volume growth momentum stayed strong and for the sixth-quarter in a row remained in double digits at 11% in 4QFY19; full-year volume growth too was in double digits. Ramco was the fastest-growing company at 20% and all of this was organic, followed by UltraTech (+15) while Ambuja was slowest at 3%.

2. EBITDA! 

Blended unit realisations rose 1-2% QoQ/YoY which was lower than CLSA's forecasts.

South firms saw strong QoQ growth while other regions/pan-India saw modest change. Unit costs declined 4% QoQ and stayed flat YoY at aggregate level – benefits were seen in energy costs and our coverage in general surprised positively on costs.

Shree saw 35% Ebitda growth followed by UltraTech (+30%) while south plays (Ramco, Dalmia) reported 12-19% growth; ACC grew 8%, while Ambuja declined 9%.

3. Fairly postive commentary! 

Despite a high volume base, industry feedback on volume growth stayed positive led by govt focus on infrastructure along with affordable housing. Exit cement prices were higher than quarter average, signalling a strong 1QFY20. Also, capacity expansion is not viewed as a big concern in the medium term.

4. Checks indicate cuts/discounts, but June is critical! 

CLSA's recent channel checks indicate that the recent elections disrupted activity on the ground due to factors like lack of workers, tight liquidity, etc. As a result, there has been a trend of higher discounts and rebates offered by channels and players in a bid to clear inventory.

Now that the election is over, CLSA in its note stated that, we believe a clear trend will emerge on demand as well as pricing as activity starts to pick-up again. Some industry participants also expect possibility of a GST rate cut to 18% from 28%.

Which stock you should buy?

With exit prices higher, 1QFY20 seems like a blockbuster, but our checks suggest higher discounts in the last two weeks due to weak construction activity. With elections behind, a clear picture should now emerge.

"We upgrade Dalmia from O-PF to BUY with a target price of Rs1,500 (was Rs1,300) and raise India Cements’ target price to Rs135(was Rs115) while retaining BUY; we are still positive on Ramco, UltraTech and ACC," CLSA said in the note.