Cement stocks are once again on the radar of investors as they are a play on economic recovery. We believe the Indian market is more likely to see a quicker recovery to normalised performance, owing to government planned spending on infrastructure and housing which will generate demand for cement products.
Equity analyst Piyush Jain covers Ambuja Cements and UltraTech Cement. He has now initiated coverage of Shree Cements.
Over the last three years, there has been a cyclical downturn in construction activity driven by slowdown in economic activity and deferral of infrastructure projects and high interest rates. This has led to soft demand for cement, ready-mix concrete, and aggregates in some regional markets in India. The fair value estimates of Shree Cements (Rs 6,464 per share), UltraTech (Rs 2,319 per share) and Ambuja Cements (Rs 262 per share) are based on the assumption of an eventual return to more normal circumstances.
All three stocks enjoy a narrow economic moat stemming from barriers to entry, and a low cost advantage. Each have also been assigned a high uncertainty rating.
Ambuja Cements has strong positions in eastern and northern India, where prospects for robust demand for building materials are brighter than in southern India. It has a wide distribution network and leading brands to serve the Indian market.
Shree Cements is well positioned for a recovery in infrastructure spending in northern India, its key market, where the prospects for strong demand for building materials are much brighter. Shree Cement’s cost leadership and market share leadership provides it with strong pricing power in north India, its key market.
Ultratech is India’s largest producer of cement and aggregates. The company has a widespread distribution network across India, where retail sales of cement through distributors account for a significant portion of demand. In our view, Ultratech being the largest pan India player, will be the prime beneficiary of an acceleration in demand growth for building materials as construction activity rebounds, and as the government commences its large scale infrastructure construction programme.
To read the stock analysis in detail, click on the relevant companies.
