3 cements stocks to buy cutting across market caps

The best way to play the infrastructure spend or realty space is the cement sector. Demand has been pretty strong even in the weak monsoon season, says Siddhartha Khemka, Head of Retail Research, MOSL

On Capital Goods Sector, Infrastructure and Real Estate
The capex cycle has eluded the corporate world for quite some time and the pandemic gave a good opportunity for the government to pull up its socks and start spending on the infrastructure side. Apart from that, they have also given some incentives for the realty sector and now we are seeing sentiments changing for the entire capital goods space and for the realty space. That definitely bodes well for some of these companies which are suppliers for infrastructure. Capex and demand rebound that we have seen post pandemic, definitely merit at least a look at some of the players. For example, L&T has consistently won large orders and that supports the entire thesis that if recovery happens and the spending on infrastructure continues or the way it has picked up continues, definitely some of these capital goods players including large infrastructure players like L&T or Siemens will benefit.

Even the spending on the government’s pet project, the smart city project, is picking up pace wherein some of these players are getting orders and execution is likely to take place over the next few years. That is a space we like. The best way to play the infrastructure spend or realty space is the cement sector. Demand has been pretty strong even in the weak monsoon season and even after that, prices have remained pretty stable and now prices are picking up and volume growth continues unabated for the cement sector pan India except for south where the prices are still a little bit on the lower side. However, demand and volume growth is about 10-12% and that is pretty strong. Plus, the margin gains that these players are benefitting out of the lower raw material costs look pretty good for the cement space. We prefer UltraTech as the most diversified large cap player as our top pick followed by JK Cement in the midcap space.

We also like ACC in the cement space as a value pick where valuations are comfortable and the company is now expanding capacity which will come on board next year and will lead to market share gains which was not there for quite some time. Now with volume growth and new capacity, ACC could be a good value pick at current levels.

On laggards & gas stocks
Many of the segments which were laggards are now picking up and rightly so, given that the valuations of the overall market and especially the front line stocks have almost reached their highs. So the interests have moved to sectors and segments which were laggards so you look at metals which are gaining on back of consistent price rise both in domestic markets as well as in the international markets. In cement, the volume growth has been pretty strong, prices are pretty stable, margins are improving so that is another segment. Finally, in the gas space, the PNGRB regulation which was pending for a long time has now been announced. The bad news is more or less digested with the exclusivity gone. There is still some clarity which is needed for the implementation of the same.

We believe it will be slow and will take time for implementing. Nonetheless, the news is over and done with and that is what the market is looking at from here on. The incumbents do have an edge in terms of presence, network and the brand that they have built over the years. That should help them grow their market from the current point in time wherein they already have market leadership in their respective segments. They are also free to enter newer markets which will lead to further growth for them.

On Auto and Auto Ancillaries
If you look at the overall auto sales, the festive season has been pretty good and what we hear from our channel checks is that even post the festival, the demand has been pretty strong. Discounts have remained lower compared to last year. LCV is now looking at marginal recovery.

Overall, the inventories have been pretty good. The inventories have come down for the passenger vehicles. Waiting period for some of the fast selling passenger vehicle models have gone up above one month. Tractors continue to do well. We are expecting around 20% growth for two-wheelers, 12% growth for passenger vehicles, 6-6.5% growth for CVs, and that is mainly on the back of LCVs which is likely to report a stronger growth of 14%, but M&HCV sales will decline by about 5%.

The joker in the pack is tractors which continues to do well and on a year-on-year basis, on a low base, tractors are expected to show a growth of 86% and the market is already factoring in a lot of these excitement in the auto stocks.

That excitement is now trickling down to the auto ancillaries, given the production guidance by some of the OEMs that they will continue to increase production even after the festive season is over. That raises hopes for improved growth not only for the OEMs but also for the auto ancillaries after a very long time. As I said, valuation to a large extent is factoring in the recovery in growth and leaves a little bit of margin for any negative surprise.

Nonetheless, we like companies with good near term visibility and focus on the rural segment. Our preferred picks in the OEMs are M&M followed by Hero Moto.