CEMENT: Demand has improved, but pricing remains muted; North and West see hikes, but South and East on the decline

The Report indicate the seasonal uptick in demand is playing out, with volumes bouncing back strongly from the weakness seen in the first few weeks of Jan. While prices have improved 1–2% MoM in North and West, the average pan-India price is down 2% QoQ thus far in 4QFY21 (+1% YoY). Cost inflation is also a concern in the near term as petcoke, coal, and diesel prices are up 71%, 4%, and 26% YoY, respectively. Therefore, we expect margins to decline sequentially for the industry, but they should still be higher YoY. We expect our coverage EBITDA to grow >20% YoY in 4QFY21, driven by ~18% YoY growth in volumes.

Volumes remain strong; peak season demand kicks in

• Following ~10% YoY growth reported in volumes in 3QFY21, we expect volumes to grow 18-20% YoY in 4QFY21 (supported by the low base of 4QFY20 – volumes declined 13% YoY on government-mandated lockdown in March).
• Demand has been strong in February (+8-10% YoY), led by continued strong demand in East, North, and Central and revival in West. Although, demand remains weak in the South.
• Demand in the East has been particularly strong (>10% YoY), supported by pre-election spending in West Bengal and strong industrial/infra demand in Odisha.
• Demand in North and Central has also improved in February – supported by a receding winter season, which has improved the pace of construction work.
• Demand in the West has rebounded strongly, led by a recovery in urban real estate and construction. Maharashtra volumes are now on the rise for the first time since the pandemic.
• Demand in the South has remained weak on a YoY basis, but improved sequentially, driven by a strong uptick in Andhra Pradesh and Telangana.

South – price down 1% MoM, but still up 9% YoY

• The Cement industry in the South has exhibited a strong production discipline in the past year, in the face of weak volumes.
• Prices in South are still up ~INR30/bag (or 9%) YoY to INR371/bag in Feb’21, led by hikes taken over Apr-May’20. Prices are up 11%/12%/12%/3% YoY in Andhra Pradesh / Tamil Nadu / Karnataka / Kerala.
• On an MoM basis, though, price is down 1% on account of a 3% MoM decline in Tamil Nadu, while it is flat across other states in the South.

North and Central – strong demand supporting price hikes

• In North and Central, demand has picked up, led by a receding winter and the end of the harvest season, enabling workers to return to construction sites.
• Prices in North are up ~2% MoM (flat YoY) to INR378/bag, led by an INR5-10/bag hike across the region, supported by high plant utilization (>90%).
• Prices in Central, however, have been flat MoM at INR349/bag (up 3% YoY).

West – demand improving; prices up 1% MoM / 3% YoY

• Demand in the West has rebounded strongly, led by a recovery in urban real estate and construction. Maharashtra volumes are now growing for the first time since the pandemic. Demand in Gujarat has also been strong at 5-10% YoY.
• In February, price is up +1% MoM / +3% YoY to INR345/bag in Mumbai, and up +1% MoM / +3% YoY to INR355/bag in Ahmedabad. Price in West, on average, is up 1% MoM to INR350/bag (+3% YoY).

East – demand strong, but price down 11% YoY

• Demand in East has been the strongest among the regions at 10-15% YoY, supported by government spending (particularly in West Bengal, Assam, and Odisha) and strong rural demand.
• However, on account of aggressive expansion undertaken by various players, East has seen the weakest pricing among the regions in the past three years – current prices are the lowest in three years. The rest of the country, meanwhile, has seen an over 10% increase in prices in the past three years.
• Price in East has declined ~INR50/bag or 15% since May’20. In February, while West Bengal witnessed a price increase of INR5/bag, price has been flat in other states. Average price in East is down 11% YoY to INR273/bag (flat MoM).

Costs – higher energy cost to be partly offset by operating leverage

• Lower petcoke price had been a tailwind for the Cement sector up to 2QFY21. However, this is now set to reverse as petcoke price has risen substantially (up 71% YoY to USD117/t). To mitigate the impact of higher petcoke prices, cement producers have increased the use of imported coal – which is up only 4% YoY (but up 29% from Nov’20). We estimate power and fuel cost to increase by INR50-70/t QoQ (5-7%) in 4QFY21 and INR120-150/t in total by 1QFY22.
• Diesel price is also up 26% YoY in Feb’21, driven by higher duties levied by the government, which would result in higher freight cost in 4QFY21.
• We expect a total variable cost increase of INR70-90/t QoQ in 4QFY21, which should be partly neutralized by seasonally lower maintenance cost and better-fixed cost absorption (on seasonally higher volumes). Thus, we expect industry EBITDA/t to remain strong at >INR1,100/t in 4QFY21 (but lower QoQ).

Top picks – UltraTech, Dalmia Bharat, and ACC

• While we are structurally positive on the industry outlook; we prefer North and Central as these markets have a higher clinker utilization of over 80%.
• We adopt a bottom-up stock-picking approach and prefer companies that: a) are moving down the cost curve, b) have the potential to gain market share, and c) provide valuation comfort.
• UltraTech is our top large-cap pick, while Dalmia Bharat is our top mid-cap pick. We also like ACC as a value pick, but do not see much upside in Shree, Ramco, and Ambuja, whose potential market share gains are already priced in.

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February 17, 2021