Stocks of cement companies including UltraTech Cement, ACC, Shree Cement, and Ambuja Cements continued to suffer losses on Tuesday as brokerages red-flagged high costs and price competition that have triggered downward risk on earnings.

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UltraTech Cement stock hit the lowest in a year during Tuesday's trade even as it was CLSA’s top pick. The brokerage sees risk-reward most attractive for the stock compared to its peers. "Ultratech will continue to gain market share given large capacity expansion (+32 percent in three years) while remaining free cash flow positive," it said.

At 2:20 pm, the stock was trading 0.8 percent lower at Rs 5,535.80 on the BSE. The cement maker’s shares have erased more than 28 percent of investors' wealth in 2022 so far (year-to-date) as against the benchmark Sensex, which has declined 7 percent during the period.

According to CLSA, listed cement companies reported 8 percent year-on-year (YoY) volume growth in FY22, while fourth-quarter growth was flat. Profitability fell 13 percent YoY to Rs 1,078 in FY22 on the inability to pass-on sharp cost inflation, it said.

The brokerage sees near-term uncertainty for elevated costs and price competition. However, it believes the cement industry is on the cusp of another round of consolidation with Adani Group taking over the Holcim group companies, Ambuja and ACC, and UltraTech recently announcing more capacity expansion.

Here’s a look at CLSA’s rating on cement stocks

“Large players, which continue to gain share and have stronger balance sheets to withstand lower profitability, are better placed,” the CLSA research report dated June 6 said.

It expects the full impact of cost inflation to be reflected in earnings in the first half of 2022-23 fiscal. The brokerage has forecast FY23 industry demand growth of 7 percent YoY and expects profitability to fall 13 percent YoY.

Here’s a look at Jefferies’ rating on cement stocks

According to Jefferies, price hikes were announced in very few markets for June 2022 and the downward risk on earnings estimates has resurfaced as the hikes are not sustaining and costs remain elevated.

The all-India average price declined 3 percent month-on-month in May 2022, the foreign brokerage said, adding that multiple markets declined driven by weak demand and discipline. The smallest decline was seen in the western region and the largest in the central region, it said. Demand was strong in the west, north and central regions, while the east and south regions were relatively weaker.

Vinit Bolinjkar, head of research, Ventura Securities, too believes that cost pressure will continue to pose headwinds for the cement industry. "Cement companies have increased prices several times in the last few months. However, price improvement continues to lag with rising costs," he said.

According to him, more price hikes are expected to reduce the demand and will result in project delays. Though the demand is expected to remain strong in FY23 due to the improvement in construction and infrastructure activities, it will depend more on the movement of cement prices, he added.

Bolinjkar told CNBCTV18.com that industry profitability will depend on the input cost and energy prices. Power, fuel and freight costs are still rising and these account for 50-55 percent of the total expenditure incurred by cement companies.

Vinod Nair, Head of Research at Geojit Financial Services also said he was cautious in the short term because elevated raw material and fuel prices are negatively impacting margins outlook for H1FY23.

"Major capacity addition by Ultratech Cement and in anticipation by new entrants is fading industry outlook. However, the current valuations is factoring in most of the negatives," he said.

However, according to him, the long-term outlook is stable on strong infra and housing demand. Any further ease in fuel and raw material prices will lead to outperformance in the medium to long-term, he added.

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