Should investors buy cement stocks after the recent market correction?

Global economies are paying the cost of the conflict between Ukraine and Russia. The conflict, which began almost a month ago, led to an increase in the prices of various commodities. Building materials prices, for example, have risen dramatically in the past three weeks due to conflict and supply chain bottlenecks in Australia. International coke prices are up 57% in the past few weeks and could rise further if coal prices continue to rise. Moreover, rise in crude oil prices will also lead to further rise in diesel prices. One of the main users of this raw material is the cement sector, which has seen a steady rise in prices since November 2021. The sector had come out of the December quarter in an already rough patch, marred by weak demand. The geopolitical crisis has further dampened the near-term outlook. On the stock exchanges, too, cement stocks have seen a sharp correction in the past few months. The likes of JK Cement, Ambuja Cement, UltraTech Cement and ACC are down as much as 31 percent so far in calendar year 2022. By comparison, the BSE Sensex is down about 1 percent over the same period. Analysts say these higher costs will affect cement profits in the near term.

Global brokerage Jefferies cut its FY23 operating profit estimates for the sector by 19 percent. She said, “Profit visibility for the Indian cement sector has fallen sharply due to the unprecedented increase in costs. The industry needs to raise prices by 8% for every $50 per ton increase in coal + coke prices just to maintain its per ton operating profit.” However, analysts believe the current headwinds are transient in nature as potential price hikes by companies will help margin pressures in the medium term. Besides, they feel that the current high international prices of coal and coke are unsustainable in the long run. Vishal Periwal of IDBI Capital expects cement operators to raise prices from the April-June quarter in line with the recent increase in diesel and petrol prices. Shah of Geojit BNP Paribas sees cement stocks as contradictory bets. Investors are advised to buy selected shares in stages. Meanwhile, ICICI Securities is heading to climb UltraTech Cement, ACC, JK Lakshmi and Sagar Cement. In short, cement stocks are likely to range-trade in the near term, driven by the volatility of commodity prices. However, the sector is expected to witness a gradual readjustment of profitability, backed by improved supply and demand dynamics, improved price discipline, cost optimization and risk de-risking efforts. On Thursday, the weekly F&O back home expires, and markets will be closely watching US President Biden’s meeting with NATO members. Besides, they will also track the two-day European Council meeting on further signals regarding the ban.

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