Foreign brokerage Goldman Sachs said FY25 is likely be one of the weakest years for the cement sector profitability in the recent past. It expects FY26 to be only slightly better. Consolidation of market share, capacity and resources will sustain premium valuations for the large players, it said.
The brokerage maintained its 'Buy' rating on Ultratech Cement and said it is neutral on Shree Cement, Dalmia Bharat Ltd and Ambuja Cements. The broking firm has 'Sell' rating on ACC.
The brokerage suggested a 12-month target price of Rs 12,460 for UltraTech Cement, Rs 1,985 for Dalmia Bharat, Rs 2,345 for ACC, Rs 575 for Ambuja Cements and Rs 27,670 for Shree Cement.
The brokerge has lowered its FY25-FY27 Ebitda estimates across the coverage, largely reflecting lower pricing assumption given the limited price hikes in Q3, and the supply-demand balance keeping its long-term price hike assumptions relatively muted.
"Our valuation multiples remain unchanged for all names expect Ultratech, where we lower the multiple to LT median +0.5STDEV (vs. +1STDEV previously). While we continue to believe in Ultratech’s ability to be the consolidator which should drive a valuation premium, we note that over the next 12-15 months, Shree Cement and Ambuja are adding equivalent organic capacity as Ultratech," it said.
Despite the weak industry profitability in FY25, the magnitude of correction in cement stocks has been far less, suggesting continued multiple re-rating.
"We attribute this to the ongoing industry structure change where the large players are (1) Growing market share; (2) Investing in new capacity; (3) Investing in green energy; and (4) Creating long-term visibility through acquisition of limestone reserves and hence we expect that despite the weak near-term numbers, the cement sector - especially the large players are likely to trade at premium to their historical valuation ranges," it said.
Goldman Sachs said with larger players adding significant capacity over the next 12-18 months, and consolidators looking to ramp up utilisations of the acquired assets, we the fight for volume share is likely to continue in Calendar 2025, which could keep pricing and therefore profitability improvement in check despite the cost tailwinds and demand pick-up.