UBS Identifies Cracks in Cement Outlook; Downgrades Ultratech, Dalmia Bharat, and Ambuja

UBS Identifies Cracks in Cement Outlook; Downgrades Ultratech, Dalmia Bharat, and Ambuja

UBS, a global financial services firm, has taken a negative outlook on India’s cement sector, deviating from the consensus view. The analysts at UBS, Nikunj Mandowara and Pramod Kumar, expressed concerns over growing competition and expensive valuations within the sector. Despite anticipating strong earnings in the coming quarters due to high demand and favorable margins, they cautioned investors about the possibility of profit-booking if stock prices experience a significant rise.

The negative outlook by UBS suggests a more cautious stance on the cement sector in India. While the sector has been performing well, with increased infrastructure and construction activities driving demand, UBS highlights the need for careful evaluation of investment opportunities. Investors are advised to consider the potential risks associated with growing competition and expensive valuations in the sector, especially in light of any substantial price appreciation.

Industry observers have raised concerns regarding the cement sector in India due to the anticipated slowdown in demand following the upcoming general elections in May 2024. Additionally, there is apprehension about the rapid increase in fresh capacity, which could surpass the medium-term demand. It is projected that around 110 million tonnes per annum (mtpa) of new capacity will be added in the next 2.5 years, while the incremental demand is estimated to be around 70 mtpa.

This potential oversupply situation in the cement sector raises questions about the sustainability of the current growth trajectory. The industry may face challenges in absorbing the excess capacity, which could put pressure on prices and margins. Investors and industry participants will need to closely monitor the demand-supply dynamics and make informed decisions considering the long-term outlook and potential risks in the sector.

UBS has expressed concerns about the competitive landscape in the Indian cement sector, noting the potential for aggressive pricing strategies as players aim to protect their market share. The entry of the Adani Group into the sector is expected to further intensify competition.

According to UBS, the valuations of cement companies are already high, with a forward EV/EBITDA ratio of 15x and an FY25 PE ratio of 30x. Considering that the sector’s growth closely tracks the GDP growth rate, UBS sees limited potential for significant upside in terms of valuation. The report also highlights the low entry barriers and return profile of low double digits in the cement sector.

Given these factors, UBS has assumed coverage of the Indian cement sector with a negative outlook, citing concerns over increasing competition and expensive valuations. Investors should take note of these observations and carefully evaluate their investment decisions in the cement sector.

UBS, in its coverage of the Indian cement sector with a negative outlook, recommends selling stocks on any rally rather than buying on dips. The foreign broking firm has assigned different ratings to specific companies in the sector. It has a ‘buy’ rating for ACC, indicating a positive outlook for the stock. However, it has a ‘neutral’ rating for Ultratech, suggesting a more cautious stance. For Dalmia and Ambuja, UBS has assigned a ‘sell’ rating, indicating a negative outlook for these stocks.

These ratings reflect UBS’s assessment of the companies’ prospects in the current competitive and valuation environment. Investors should carefully consider these recommendations and conduct their research before making investment decisions in the Indian cement sector.

According to UBS, the target price for ACC is set at Rs 2,200, indicating a potential upside from its current price of Rs 1,775.75. Similarly, UBS has a target price of Rs 440 for Ambuja, implying a potential upside from its current price of Rs 418.

For Ultratech, the target price is Rs 8,900, which suggests a potential upside from its current price of Rs 8,175.40. Lastly, UBS has set a target price of Rs 2,190 for Dalmia Bharat, indicating a potential upside from its current price of Rs 2,060.

These target prices represent UBS’s assessment of the stock’s fair value and their potential upside. However, it’s important to note that target prices are subject to change and investors should consider them along with other factors when making investment decisions.

UBS highlights the limited potential for value-accretive mergers and acquisitions within the cement sector, which could pose risks related to overcapacity and expansion not meeting guidance. This situation, combined with the sector trading at an expensive valuation in the 90th percentile of its five-year valuation range, raises concerns about potential de-rating. These factors contribute to UBS’s negative outlook on the sector and its cautious stance on cement stocks.