Making sense of the rise in Cement Demand!
The cement sector in India is witnessing a surge in demand as the country invests in infrastructure projects to boost economic growth. This has led to a race for capacities among cement companies in the country. In this article, we will discuss the current state of the cement sector in India and analyze the outlook for the sector in the near future.
How is the Cement Industry performing now?
Cement is a sector which is purely domestic in nature. Also, it’s a sector which is regional in nature.
The selling price of cement is mainly dependent on domestic supply & demand. If a company has to cover a long distance to transport the product, it would not be feasible to sell that quantity of cement in the market due to transportation costs and logistics.
One needs to understand that the sector has faced a lot of headwinds and earnings have been depressed due to that. The reasons being high input costs which they were not able to pass on and a fear of a lot of capacity additions due to entry of an aggressive player.
Why should the Cement Industry be considered as an investment opportunity now?
Some of the issues highlighted above have subsided as input costs have come down quite a bit, and we also believe that capacity additions will slow down. There are many companies which are trading at a far bigger discount than their average EV/tonne valuations. Many companies are available at 33% to 50% of their replacement cost. The smaller players are discounted heavily and as capacity increases, the discount reduces. Many larger players still trade higher than the replacement cost. We believe there is good opportunity in the small and midcap cement players, from a valuation perspective. EBITDA/tonne is set to increase for most players in FY24. Many small and midcap cement companies have seen the OPMs (Operating Profit Margins) halve in the recent quarters. The larger ones due to economies of scale have far lesser impact on their margins as compared to the mid and smaller cement players.
Aurum’s take on Cement Cos.
We believe OPMs (Operating Profit Margins) will revert to their mean soon. And hence the delta will be higher for the mid and small cement companies. There is a good margin of safety while investing in this sector. Of course, do look at the history of companies and look at the ones who are efficient and have waded well during downcycles and during tough times.
Aurum’s Cyclical Bets smallcase has a total of 20 stocks of which 3 are cement stocks.
About Aurum Capital’s Cyclical Bets smallcase
Cyclical investing is investing in stocks belonging to sectors which are under-performing currently & are available at bargain prices and cashing out when these sectors see a turnaround with economic growth.
Interestingly, cyclical stocks make up nearly three quarters of our stock market. The term cyclical stocks just doesn’t mean the metal stocks cycle that we have recently seen, but also includes sectors like autos, commodities, capital goods, chemicals, and even defense. It is safe to say that our ENTIRE STOCK MARKET IS CYCLICAL.
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Aurum Capital is a SEBI Registered (SEBI Registration No. INH000008118) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.