Cement Stocks: In a positive development for the cement industry, international pet-coke prices have experienced a significant drop of more than 50% from their peak levels. This decline is seen as a promising sign by experts, who anticipate that it will drive the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) per tonne in the first half of FY24. Among the cement stocks poised to benefit from this trend are Ultratech Cement, Shree Cement, JK Cement, and JK Lakshmi Cement.

A recent note from analysts at Antique Stock Broking, including Krupal Maniar, Harshal Milan Mehta, and Kartik Bhandari, highlighted the strength of industry demand in April 2023. The note revealed that the demand grew in high single digits year-on-year (YoY), while the average pan-India prices have remained relatively stable compared to the exit prices in March 2023. Moreover, the prices of imported fuel have corrected by approximately 10% month-on-month (MoM) in May 2023, resulting in a decline of over 50% from their peak.

According to the analysts, a 10% fall in fuel prices translates to a positive impact on EBITDA equivalent to a ~2% price hike. The substantial decrease in international petroleum coke prices, which have plummeted by more than 50% and are currently valued at $125-130 per tonne since March 2023, contributes to this positive scenario. On the domestic front, pet-coke prices have also witnessed a decline, with a 35% drop from peak levels and a 20% decrease since March 2023, reaching ₹14,639 in May so far. Analysts expect further corrections in June.

Furthermore, all grades of imported coal prices have experienced a similar downward trend, with reductions exceeding 50%. For example, the prices of South African 6000 NAR CFR have fallen below Russian coal prices of the same grade for the first time since the Russia-Ukraine war, with South African coal priced at $125 and Russian coal at $130.

Antique Stock Broking analysts predict that the average fuel cost will slide below ₹1.9/kcal (spot) in comparison to ₹2.3/kcal in Q4, leading to a benefit of ₹250-300 per tonne. This benefit is expected to be reflected in the first half of FY24 (H1FY24). Moreover, they anticipate that the average EBITDA for the cement industry will increase by over ₹150 per tonne quarter-on-quarter (QoQ) in Q1FY24. Although the YoY decline had persisted for seven quarters, it is projected to remain nearly flat YoY in Q1FY24. Additionally, in Q2FY24, the positive impact of lower fuel prices may partially offset any negative operating leverage and potential price reductions.

The analysts’ note asserts that companies under their coverage are expected to witness an increase of ₹400 per tonne in EBITDA, from ₹800 per tonne in FY23E to ₹1,200 per tonne in FY25E. This growth will be driven by lower fuel costs, improved cost efficiencies, and higher realizations. However, potential risks include lower demand or prices and higher cost escalations.

Regarding cement stocks, the note suggests that while the short-term performance of these stocks may be range-bound during the seasonally weak monsoon period, the medium-term outlook remains favorable due to the potential for earnings to exceed expectations through lower costs and increased consolidation. The note reiterates a positive stance on the sector, highlighting Ultratech Cement and Shree Cement as top picks, alongside JK Cement and JK Lakshmi Cement.

In line with their recommendations, the brokerage has advised investors to buy these stocks, setting the following target prices:

Ultratech Cement: ₹8,900 apiece.
Shree Cement: ₹28,000 apiece.
JK Cement: ₹3,220 apiece.
JK Lakshmi Cement: ₹910 apiece.

During the opening bell on Wednesday, Ultratech Cement stock traded at ₹7,732.85 apiece, reflecting a modest increase of ₹40.10 or 0.52%. Shree Cement traded at ₹24,513.20 apiece, showing a rise of ₹75.95 or 0.31%. JK Cement experienced a 0.4% increase to reach ₹3,060.40 apiece, while JK Lakshmi Cement inched up to trade at ₹799.05 apiece.

In conclusion, the recent plunge in international pet-coke prices has positioned four cement stocks, namely Ultratech Cement, Shree Cement, JK Cement, and JK Lakshmi Cement, as top picks in the industry. The decline in fuel prices is anticipated to have a positive impact on EBITDA, leading to increased profitability for these companies. While short-term performance may be affected by seasonal factors, the medium-term outlook remains promising, driven by lower costs and the potential for earnings to surpass expectations. Investors are advised to seek advice from certified experts before making any investment decisions.