Buzzing cement stocks: Inorganic growth and energy cost decline spark industry optimism

In Tuesday’s trading session, cement stocks are generating significant attention due to two major news pieces. Firstly, JK Cements has announced its inorganic growth strategy with the acquisition of Toshali Cements Private Limited. The deal, valued at around $30 per tonne, marks JK Cement’s entry into east India.

However, the completion of the acquisition is subject to certain conditions, which may take up to six months. This development presents a positive outlook for JK Cement’s expansion.

The second news item revolves around Sanghi Industries, which reportedly has attracted interest from potential suitors, namely the Nirma Group and JK Organisation. However, these reports have not been independently verified by CNBC-TV18.

According to reports Sanghi Industries is on the block and the primary challenge in finalising a deal could be the valuation, which might act as a potential deal breaker.

Nonetheless, Sanghi Industries possesses an asset with a capacity of 6 million tonnes in west India, including limestone resources, which remains largely untapped. Despite the potential, the asset’s full value has yet to be realised.

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Another notable development in the industry is the decline in energy costs, which could act as a significant tailwind in FY24. Prices of petcoke have decreased by $50 to $60 per tonne compared to the previous quarters, including the third.

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South African coal prices have also dropped, reaching approximately $100 per tonne, which is $30 lower than the previous quarter and nearly half of the value in quarter three.

However, the benefits of these cost reductions may not be immediately evident in the first quarter due to the presence of high-cost inventory, coupled with relatively stagnant cement prices. Nevertheless, from the second quarter onward, the industry is expected to experience the positive effects of these developments.

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Jefferies forecasts an EBITDA improvement of over Rs 200 compared to the previous year, while Axis Capital anticipates an approximate 25 percent increase in EBITDA per tonne for their coverage universe.

In summary, although cement prices have not experienced significant movement, the industry is poised to benefit from favorable operating leverage due to the upcoming election year, resulting in increased volumes. Additionally, the cooling off of input costs adds to the positive outlook for cement companies.