A sleeping villain may be about to haunt the low-income construction sector. According to Itaú BBA, inflation in construction is beginning to show signs of returning as a reality.
The bank points out that the sector as a whole has become accustomed to low inflation in the last two years – but should it have?
“We fear that this may be the calm before the storm, as Brazil has rarely seen the INCC remain at the current level of 4-5% for long,” analysts Daniel Gasparete, Luiz Capistrano, Mariangela Castro and Alejandro Fuchs said in a report published today.
What caught the bank’s attention was the rapid acceleration of the index. While the INCC in 2023 was 3.34%, by September the index had already reached 5.22% in the accumulated 12 months.
With high demand in the sector, wages are expected to continue to be under pressure (around 7%, according to the bank) and, to worsen the situation, increased activity may put pressure on material inflation – which until now was helping to hold back the INCC.
Among the highest increases in the INCC in the last month were rebar (+1.6%), wages (+0.76%), concrete blocks (+0.7%) and ready-mix concrete (+0.67%).
According to the analysts, the September INCC showed that “the main drivers of material inflation were precisely the structural items,” something that was not happening before.
In this scenario, the most impacted companies will be those with greater exposure to the lower income brackets of the Minha Casa Minha Vida program, those in an accelerated phase of construction, and those operating with faster sales (implying a shorter window to adjust prices).
According to the analysts, Tenda and Cury are the ones that most fit these criteria; Itaú BBA is restricted in the coverage of MRV Engenharia.
“We believe that companies that rely on higher margins to improve cash flow will suffer more in this scenario,” wrote the team.
Nevertheless, the scenario is far from catastrophic: Itaú remains optimistic about the stocks of low-income construction companies, seeing attractive levels of IRR (internal rate of return) and potential “robust dividend payments and profit growth.”
The bank’s main recommendation in the sector continues to be Direcional. Itaú BBA estimates an IRR of 25%, with the company trading at 6.5x the estimated earnings for 2025.
But if the pessimistic scenario materializes, analysts consider the possibility of switching preference to Cyrela, due to the discount on the shares: Cyrela trades at a P/B multiple of 0.9x.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
