Cement stocks on the cusp of a new growth cycle: Morgan Stanley

NEW DELHI: Cement firms are on the cusp of a brand new cycle that can result in a long-term appreciation in share costs, Morgan Stanley mentioned, elevating incomes estimates and worth targets for many of the shares beneath its protection.
The worldwide dealer is anticipating broad-based and above-average demand development of 9 per cent yearly over FY21-23 and sees margins holding up on a two-year foundation (regardless of a dip in FY22). It additionally raised FY23 earnings estimates as much as 1 per cent, which is 4-5 per cent greater than consensus.
“The cement business is starting a brand new cycle, and we advise taking part in the cycle slightly than specializing in near-term cement worth actions. We might use share worth volatility to build up choose shares,” mentioned Gaurav Rateria and Mukund Sarawogi, fairness analysts at Morgan Stanley.
The dealer upgraded Grasim Industries to chubby, for which it has a goal of Rs 1,700. It retained an chubby ranking on Ambuja Cements and with targets of Rs 360 and Rs 8,000, respectively.
On the similar time, Morgan Stanley additionally downgraded Shree Cement to equal weight and ACC to underweight with respective targets of Rs 32,100 and Rs 1,950. The overseas brokerage additionally retained its underweight ranking on Dalmia Bharat with goal of Rs 1,300.
“With bettering development visibility, we see re-rating and premium widening versus friends for each Ultratech and Shree. We choose Ultratech to Shree for valuation. We like Ambuja primarily based on robust development visibility and company-specific price levers. We see potential narrative change for Grasim as the worth of standalone companies rises in complete SOTP and capital allocation issues are addressed,” mentioned Rateria and Sarawogi.

The duo mentioned their conviction on the business stems from round 80 p.c utilisations throughout India and common worth rise, which means the business has been passing price inflation to prospects.
Shares of cement firms have been on an uptrend, particularly after the Union Funds allotted extra for the infrastructure tasks. Revival in residential home market has additionally made them extra enticing however analysts consider the Road can be not pricing every little thing.
“We consider the Road is underestimating margin potential for cement shares in FY23. We anticipate margins to shock positively in the course of the March 2022 and June 2022 quarters and drive earnings upgrades for FY23 over time,” mentioned Morgan Stanley analysts.
The brokers mentioned this cycle of development for the cement firms is completely different from earlier cycles for multitude of causes, together with:

Capability addition is far slower
Market share is extra concentrated among the many high 5
New capability additions are led by the highest 5 gamers, which have gained good quantity market share.
“We see restricted room for irrational aggressive conduct in most areas, though we’re extra constructive on the North, Central, and Gujarat markets vs. the South and East,” each analysts mentioned within the be aware dated March 8.

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