Is It Time To Buy Indian Cement Stocks? Morgan Stanley Answers
Cement stocks have underperformed over past few months amid weak demand and cement price rollbacks, but some price hikes likely in next few months
(The Corner Office Journal) -- Morgan Stanley said Indian cement stocks have underperformed over the past few months amid weak demand and cement price rollbacks, but some price hikes are likely over the next few months due to visibility in demand.
“Given how demand/prices behaved until now, we believe consensus estimate downgrades for cement stocks are now on their last leg, which will likely end with the upcoming results season,” the brokerage said in an investor note.
What Happened Recently?
Morgan Stanley said cement demand was muted during the monsoon period, affecting already struggling cement prices and there were no clear triggers for near-term stock performance.
Cement demand was muted during 2QFY25, up around 1% year-on-year by MS estimate, and pan-India cement prices fell around 3% quarter-on-quarter, it added.
How Cement Stocks Fared?
The brokerage said it saw strong underperformance in cement stocks, with cement stocks under its coverage falling about 6% over the past three months (market cap-weighted average basis), while the Sensex moved up around 2% during the period.
What's Changed Now?
Morgan Stanley is now seeing green shoots of demand coming back. The brokerage said its discussions with industry players across the capital expenditure value chain suggest a return of government projects, which have lagged amid central elections followed by monsoons.
“We believe this, coupled with retail demand pickup after the festive season, can drive strong acceleration in demand growth,” it added.
On the price front, Morgan Stanley said that after multiple months of rollbacks, it finally saw some price hikes being partially sustained last month, and there have been attempts at further hikes this month as well.
“We believe there is a case for sustained hikes over the next few months,” it noted.
Is It Time To Buy?
Morgan Stanley said though FY25 earnings remain at risk, there are limited risks to FY26/FY27 earnings estimates currently, as the medium-term demand-led margin expansion growth story still remains intact.
“Against this backdrop, we believe a pickup in demand and some price hikes can drive strong outperformance for cement stocks over the next few months,” Equity Analyst Rahul Gupta wrote in the note.
What's Medium-Term Outlook?
The brokerage said industry demand is expected to remain robust over the next few years, but cement price hikes will likely be nominal at best over the next couple of years.
That's because the industry is likely to focus on capacity digestion following both mergers and acquisitions activities as well as organic expansion, and cement prices may take a back seat, it added.
“Hence, margin expansion should be led mainly by cost improvement, supported by operating leverage,” Morgan Stanley said.
Who’s Better Positioned?
Against this backdrop, the brokerage said it believes companies with pan-India franchises and cost improving capabilities look relatively better positioned.
Morgan Stanley said it still views UltraTech Cement Ltd. and Ambuja Cements Ltd. as the best ways to play this cycle.
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