Cement price hike will be a tailwind as stocks run consolidation hopes: JPMorgan

Parekh was, however, uncertain about the companies that could be bought. He said, unlike other industries, cement does not demand a lot of capex on a run rate basis, once a plant is set up, a firm has annuity cash flows. “So, one also needs to consider that if you do not have leverage on your balance sheet and you have an annuity cash flows, are there enough willing sellers to go around, even if there are buyers at a certain price?” he said.

Most recently, global brokerage Macquarie upgraded ACC and Ambuja Cements to outperform from neutral. The brokerage believes the recent $2.5 billion fund infusion and doubling capacity will see Ambuja’s growth profile re-rate. It has raised the calender years 2022 and 2023 EBITDA estimates for Ambuja by 5 percent and 6 percent and ACC by 4 percent and 7 percent.

According to the JPMorgan analyst, cement stocks are running consolidation hopes rather than fundamentals. He also believes that the cooling down of pet coke prices and the hope of cement price hikes will be a tailwind for the industry.

“Just two months or so ago, fundamentals on the margin for cement stocks were improving — petcoke prices had fallen 30 percent, there were seasonal cement price hikes, which were supposed to start from the festival season, stocks had underperformed, and now the stocks have started rallying across the board,” he noted.

According to Parekh, what has happened in the last four to six weeks is purely expectations of an event. "Our problem is that we look at fundamentals no momentum, and when for fundamentals, we look at the capacities that are getting ready for commissioning over the next 12 months, companies who are putting money into organic capacity expansion, and that's a very big number."

Given this context, he believes the incremental supply demand will not be as positive as it was in the last 18 to 24 months. "So at some point of time, this expectation that the markets have to need to crystallize into action for stock prices to be supported otherwise, there would be a disappointment," he said.