Morgan Stanley downgrades cement companies

The profitability of Indian cement companies should recover from the recent lows, but the pace will be slower than expected, said Morgan Stanley, downgrading its view on the industry to ‘in-line’. The financial services company has downgraded UltraTech Cement to ‘equalweight’ from ‘overweight’ and cut target price by 17 per cent to Rs 4,116. It has also cut rating on Grasim Industries to ‘equalweight’ and lowered target price by 25.5 per cent to Rs958. Morgan Stanley has maintained ‘underweight’ ratings on Shree Cement and JK Lakshmi Cement, and an ‘equalweight’ rating on Ambuja Cement. ACC is Morgan Stanley’s only ‘overweight’ rated stock in the sector due to operating leverage and valuation relative to history. Shares of UltraTech Cement ended down 1 per cent at Rs 4,047.30. Grasim Industries ended down 3.1 per cent at Rs 830.90. Cement companies’ earnings in the first half of the ongoing financial year 2018-19 (April-March) was disappointing due to weaker-than-expected cement prices and higher costs, said Morgan Stanley. The firm raised FY19 demand growth estimate to 9 per cent from 7.5 per cent due to strong first half of financial year 2018-19. However, it sees downside risks in the urban and semi-urban real estate segment even as infrastructure-led demand is likely to be sustained. Morgan Stanley expects industry capacity utilization to rise a modest 1 percentage point from a year ago in the next financial year 2019-20, to 79 per cent. Potential moderation in demand in the second half of FY19 also caps upside risk to prices, said Morgan Stanley.