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Large¬sized cement companies such as UltraTech Cement, Shree Cement, Ramco Cement, Orient Cement, ACC and Ambuja Cement may see earnings upgrades in the coming quarters. 

Factors such as rising cement prices, better cost efficiency, capacity expansion and enhanced infrastructure investments by the government improve revenue visibility for large cement companies. In the past three months, cement prices have risen in the range of 6¬ 11%. In the northern region, prices rose in the range of Rs 20¬25 per 50 kg bag, followed by Rs 15 per 50 kg bag in South and West. In East, cement prices were flat. 

According to a Goldman Sachs research, in the South, cement demand was driven by roads and port projects, while it was rural infrastructure projects which boosted demand. Cement prices are expected to increase more in the coming quarters in the wake of high infrastructure investment projects announced by the government in the Budget, mainly in the rural areas. It is estimated that over 60% of cement demand comes from housing and construction activities of which rural housing demand has a high share. The government is expected to spend Rs 2,21,246 crore on infrastructure, which includes roads and railways for FY17. Due to this, it is estimated that cement consumption is expected to rise close to 290 MT by FY17 from 253 MT in FY15. Demand may increase by 7% in FY17 from 4.9% two years ago. Goldman Sachs, in its report, said: "We expect 9% annual demand growth during FY16¬19 led by the government's focus on infrastructure (roads, railways, metros) and "housing for all" by 2022." Besides, limited capacity addition and benign costs due to shift to pet coke as raw material by most cement companies would also enhance earnings' growth in the coming quarters. In addition, since a large part of the capacity expansion is funded by reinvestment of cashflow from operations, their balance sheets are leaner than their previous capital expenditure cycle. 

It is estimated that as demand grows, average capacity utilisation of large¬sized cement companies is expected to enhance to 75.6% by FY18 from current 69%. This should boost operating profit of cement companies in the coming quarters. Nitin Bhasin and Achint Bhagat of Ambit Capital said, "After five years of no EBITDA growth against the 36% annual growth over FY05¬10, the earnings of the sector should recover over FY16¬18. While volume growth may hover around 6¬8% (compared with hopes of 10¬12%), pricing stability (6¬7%) and lower costs (flat to 1¬2% growth) will boost earnings growth. We expect 36% CAGR over FY16¬18E for UltraTech, Shree Cement, Ramco Cement, Orient Cement, ACC and Ambuja."

Source: Economic Times