Are Ambuja, UltraTech, Dalmia, and Nuvoco Best Placed to Benefit From Improving Sector Fundamentals?

Synopsis: HSBC remains positive on the cement sector as cost pressures are expected to ease and pricing power improves. The brokerage prefers Ambuja, UltraTech, Dalmia, and Nuvoco, citing their strong positioning to benefit from lower costs, disciplined pricing, and improving industry fundamentals.

The cement sector is witnessing improving fundamentals as cost inflation concerns are expected to ease over the coming quarters. With input costs likely to peak in the near term and gradually decline thereafter, manufacturers could see better margin performance and stronger earnings growth.

Adding to the positive outlook, lower crude oil prices and a moderation in industry-wide capacity additions are expected to support profitability. However, analysts believe that maintaining pricing discipline across the sector will be crucial for sustaining price increases and unlocking further earnings upgrades.

Stocks movement

With a market capitalisation of Rs. 1,05,756 cr, the shares of Ambuja Cements Ltd closed at Rs. 427.85 per share, up from its previous close of Rs. 424.05 per share. With a market capitalisation of Rs. 3,35,971 cr, the shares of UltraTech Cement Ltd closed at Rs. 11401.25 per share, up from its previous close of Rs. 11,370.95 per share. 

With a market capitalisation of Rs. 32,040 cr, the shares of Dalmia Bharat Ltd closed at Rs. 1708.20 per share, down from its previous close of Rs. 1,720.10 per share. With a market capitalisation of Rs. 11,202 cr, the shares of Nuvoco Vistas Corporation Ltd closed at Rs. 313.65 per share, up from its previous close of Rs. 313.60 per share. 

HSBC on the Cement Sector

HSBC remains constructive on the cement sector, expecting current cost inflation concerns to gradually ease over the coming quarters. According to the brokerage, input costs are likely to peak in the first quarter (Q1) before starting to moderate, with a more meaningful decline anticipated in the second half (H2) of the financial year. This should provide relief to cement manufacturers whose margins have been under pressure from elevated fuel, freight, and energy costs.

A key factor supporting the outlook is the recent decline in crude oil prices. Lower crude prices typically reduce the cost of petcoke, diesel, and transportation, which are significant components of cement production and distribution expenses. HSBC believes that if crude prices remain subdued, the industry could see a further reduction in costs by FY28, supporting profitability and cash flows.

The brokerage also notes that the slowdown in new capacity additions across the industry is a positive development. With fewer large-scale capacity expansions, the risk of oversupply reduces, which can help maintain a healthier demand-supply balance. However, HSBC emphasizes that this alone will not be sufficient to drive earnings upgrades.

The most important factor for stronger earnings growth, according to HSBC, is industry discipline in pricing. Cement companies will need to avoid aggressive price competition and maintain rational pricing strategies. Sustainable cement price increases are essential for translating lower costs into higher margins and improved earnings. Without pricing discipline, the benefits from cost reductions could be diluted.

Based on this outlook, HSBC’s preferred picks in the sector are Ambuja Cements, UltraTech Cement, Dalmia Bharat, and Nuvoco Vistas, all of which carry Buy ratings. The brokerage believes these companies are well-positioned to benefit from improving cost trends, strong market positions, and potential pricing gains. HSBC continues to maintain Hold ratings on JK Cement and Shree Cement, indicating a more balanced risk-reward profile at current valuations.

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