Top 5 Cement Picks for India's Growth Story

After a slowdown in the last decade, there is a revival in cement demand, powered by a confluence of factors.

The promise of sustained growth in the medium to long term comes from the government's renewed focus on infrastructure and housing, key drivers for cement demand growth.

The Union Budget for 2023-24 has allocated substantial funds to key infrastructure projects, pouring billions into metro projects, high-speed rail corridors, and airport upgrades.

The continued emphasis on affordable housing, evident in a 66% increased allocation for the Pradhan Mantri Awas Yojana (PMAY) further augments the sustained demand for cement.

The upswing in the capital expenditure (capex) cycle in tandem with the resurgence of the commodity cycle is driving construction activities.

With this in mind, we highlight five cement stocks well-poised to ride the uptick in demand.

# 1 Ultratech Cement

At the top of our list, we have Ultratech Cement.

In the past decade, UltraTech Cement has undergone transformative growth, enhancing its capacity to an impressive 127 m tonnes.

This expansion has resulted in the company securing a formidable market share, establishing UltraTech Cement as India's largest cement company.

UltraTech Cement has positioned itself strategically, operating plants across the country, adeptly aligning with the regional dynamics of the industry. Its growth extends internationally to the UAE, Bahrain, Bangladesh, and Sri Lanka as well.

Ultratech Cement Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	33.3%	2.4%	5.6%	16.8%	20.0%
Operating Profit Margin (%)	18.8%	23.3%	27.5%	20.2%	15.6%
Net Profit Margin (%)	5.8%	13.6%	11.9%	12.1%	7.1%
Return on Capital Employed (%)	10.0%	11.8%	14.8%	14.9%	13.2%
Return on Equity (%)	8.8%	17.1%	12.8%	15.2%	9.7%

Data Source: Ace Equity

The business has performed well, on the back of capacity expansion and improved profitability. While the sales have grown at a compound annual growth rate (CAGR) of 15.1%, the net profit has grown at 17.9%.

The returns have also been stable, with a 5-year Return on Equity (RoE) and Return on Capital Employed (RoCE) of 12.7 and 12.9%, respectively.

Looking ahead, the cement giant aims to increase its market share from 26% to 34% by 2028. To achieve these ambitious goals, the company has recently acquired Kesoram Cement.

Following the acquisition of Kesoram and the planned organic expansions, UltraTech anticipates a total capacity surge of 192 m tonnes within the next four years, implying a CAGR of 10.5% during the financial year 2023-27 period.

Given the utilisation rate below 80% in FY23, this outlook provides a clear vision for sustained industry-leading growth and further gains in market share over the medium term.

#2 Ambuja Cement

Next on our list is Ambuja Cement.

Ambuja, recently acquired by the Adani Group, ranks among India's largest cement companies with 31.5 m tonnes capacity. It holds a 6% market share nationally, spread across north, central, west, and east India.

Along with ACC, the join entity has over 60 m tonnes of India's cement capacities. The joint entity aims to double its consolidated capacity to 128 m tonnes by 2028.

In line with these goals, Ambuja recently acquired a 56.74% stake in Sanghi Industries for Rs 50 billion, fully funded internally. Looking ahead, it has set its sights on expanding organically by 19.2 m tonnes by 2025-26.

The cement player has been constantly focusing on cost reductions for margin enhancement and enjoys a reputation as the lowest-cost operator in the industry.

Ambuja Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	10.4%	4.8%	-9.8%	17.5%	35.3%
Operating Profit Margin (%)	15.5%	17.0%	19.7%	19.7%	13.3%
Net Profit Margin (%)	10.5%	9.1%	11.2%	11.1%	6.9%
Return on Capital Employed (%)	14.3%	17.4%	17.6%	22.0%	13.7%
Return on Equity (%)	13.8%	12.0%	13.3%	15.4%	11.6%

Data Source: Ace Equity

Between 2019-2023, the company's sales and net profit grew at a 5-year CAGR of 10.6% and 9.2%, respectively.

The 5-year average RoE and RoCE also stand at an admirable 13.2% and 17%, respectively.

With no debt on its books, Ambuja boasts a healthy, well-capitalized balance sheet, well-set for its next leg of expansion.

#3 Dalmia Bharat

Third on our list is Dalmia Bharat.

Dalmia Bharat has built a cement capacity of 43.7 m tonnes across South, East, and North East regions, commanding a 5% market share. It's among the country's fastest-growing cement companies and has been working efficiently to boost its profitability.

Dalmia Bharat Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	11.3%	0.5%	4.2%	11.5%	19.1%
Operating Profit Margin (%)	23.2%	21.3%	33.7%	19.8%	15.8%
Net Profit Margin (%)	3.7%	2.2%	13.5%	6.4%	7.0%
Return on Capital Employed (%)	5.3%	4.7%	10.2%	7.6%	8.1%
Return on Equity (%)	4.9%	2.3%	10.2%	5.8%	6.8%

Data Source: Ace Equity

While the sales have reported a 5-year CAGR of 9.1%, the net profit has grown at 30.1%, between 2019-2023.

Its focus on efficiency has driven profitability, facilitating balance sheet deleveraging and providing flexibility for future expansion.

The 5-year average RoE and RoCE stand at 5.9% and 7.1%, respectively. The debt to equity stands at 0.2x in financial year 2023.

By financial year 2026, the company targets expanding its capacity to 49.5 m tonnes, involving an investment exceeding Rs 60 bn. The investment will be funded via a prudent mix of internal accruals and debt.

Simultaneously, the company is acquiring the cement assets of Jaypee group's flagship entity, JAL. This strategic acquisition comprises a 9.4 m tonne cement plant for a consideration of Rs 56 bn.

#4 JK Cement

Fourth on our list is JK Cement.

JK Cement has a total cement capacity of over 20 m tonnes. While the company enjoys a strong presence in North, West, and South India, it aims to enter untapped markets to explore new growth avenues. The company plans to augment its total capacity to 25 m tonnes.

JK Cement has earmarked an investment of Rs 21 bn, directing funds towards expanding cement capacity and various debottlenecking operations. In financial year 2023 alone, the company has successfully added over 3 m tonnes (grinding unit only) at a capex of Rs 2.9 bn.

JK Cement Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	7.2%	10.3%	14.1%	21.1%	20.6%
Operating Profit Margin (%)	17.4%	22.4%	25.0%	17.8%	12.6%
Net Profit Margin (%)	5.0%	8.3%	10.6%	7.5%	3.8%
Return on Capital Employed (%)	12.7%	16.9%	20.0%	16.8%	10.6%
Return on Equity (%)	11.3%	16.9%	20.8%	16.9%	9.3%

Data Source: Ace Equity

The business has done well, with the sales and net profit growing at a 5-year CAGR of 14.5% and 7.9%, respectively. The 5-year average RoE and RoCE stand at 15% and 15.3%, respectively.

Despite adding fresh capacity, JK Cement has actively reduced its debt, lowering the debt-to-equity ratio from 0.9x in financial year 2023 to 0.63 as of September 2023. This deleveraging paves the way for seamless expansion, with a commitment to maintaining the current debt levels in the future.

Looking ahead, the objective is to finance the expansion through the generated cash flows as the newly added capacities become operational.

#5 Nuvoco Vista Cement

Last on our list is Nuvoco Vista.

Nuvoco Vista is the fifth-largest cement player in the country. The company ramped up its capacity recently and now operates at 25 m tonnes, catering to the northern and eastern states of the country.

Nuvoco Vista Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	15.6%	-3.9%	10.1%	24.4%	13.3%
Operating Profit Margin (%)	13.6%	19.6%	20.0%	14.9%	10.3%
Net Profit Margin (%)	-0.3%	3.7%	-0.4%	0.3%	0.1%
Return on Capital Employed (%)	5.2%	8.3%	5.7%	4.3%	-1.0%
Return on Equity (%)	-0.5%	4.9%	-0.4%	0.4%	0.2%

Data Source: Ace Equity

The company has doubled its capacity, leading to a 5-year CAGR of 11.5% in sales. However, much of this growth comes on the back of elevated borrowings. While the company has been repaying debt, the debt to equity in financial year 2023 stood at 0.4x.

The high debt on books explains why Nuvoco Vista has reported losses in the past few years.

Presently, the company operates at high utilisation and is confident of sustaining growth at its current capacity. It has renewed its focus towards balance sheet deleveraging through enhanced realizations and a greater share of premium cement.

The planned capex of Rs 6 bn this year is to support brownfield expansions, siding projects and routine factory investments, as Nuvoco aims to reduce net debt before any major expansions.

With a strong retail focus, a prominent premium brand presence and a commitment to improving its balance sheet, Nuvoco Vista presents an appealing opportunity for investors.

In conclusion

In the first half of 2024, most companies reported upbeat demand, confident of double-digit growth in 2024. While profitability fell to low single-digits in the first half of financial year 2024, price increases and lower costs indicate a sharp uptick in the second half.

Going forward, the long-term prospects look good.

However, despite the bright prospects, investing in cement stocks also requires careful analysis and consideration of individual risk profiles. It is crucial to gain a deep knowledge of the business and the industry it operates to make a well-informed investment decision.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...