Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Saurabh Dugar, Institutional Research Analyst, HDFC Securities
The Indian cement sector continues to deliver strong performances. In 4QFY21, it achieved a multi-year high utilisation of 90% along with robust unitary EBITDA of >INR 1,200/MT. This supported the industry's historic high margin of INR 1,250/MT despite the fact that both demand and utilisation were subdued during the year. Not only did the industry exhibit superior cost control, it also trimmed its working capital, thereby accelerating gearing reduction. We expect demand to accelerate FY22E onwards, thus boosting utilisation and pricing power. However, margin is likely to cool off a bit in FY22E (pulled down by soaring fuel prices). We remain bullish on the sector's profitability prospects, which should sustain valuation rerating. Top picks - UltraTech, Dalmia Bharat, Birla Corp, JK Lakshmi and Sagar Cements.
4QFY21 - All-time high utilisation along with robust margins: We have analysed the aggregate performance of 14 companies under our coverage (including 4Q estimates for JK Cement and Deccan Cement, whose results are awaited). Solid demand uptick in 4Q drove up utilisation to 90% and aided realisation buoyancy (average NSR up 3% YoY). Further, strong fixed cost controls more than offset fuel inflation impact and unitary EBITDA soared 14% YoY to ~INR 1,230/MT (5th consecutive quarter of >INR 1,000/MT EBITDA). Almost all companies reported superlative margins.
FY21 is a year to remember: While weak offtake in the first half of FY21 (1HFY21) subdued utilisation to ~73%, healthy pricing and all-round cost reduction bolstered unitary EBITDA to an all-time high of INR 1,250/MT (+19% YoY). FY21 is a special year when the industry reduced its working capital, which bolstered free cash flows and led to gearing reduction.
Outperformers during 4Q/FY21: While the sector as a whole delivered strong 4Q, Ambuja and UltraTech outperformed both on volume and margin fronts. Similarly, in FY21, Dalmia, UltraTech and Shree topped the industry in terms of volumes and margins. Almost all companies reported leaner working capital, which accelerated gearing reduction.
Outlook and recommendations: We remain bullish on the sector's prospects, given the presence of demand and margin tailwinds (refer to our recent thematics on the sector: Riding High and Spotting the Sweet Spot). We expect demand to accelerate FY22E onwards, boosting utilisation and pricing power. We believe that the industry's unitary EBITDA would marginally cool off in FY22E, mainly on account of soaring fuel costs. The industry has been seeing valuation rerating over the past five years, owing to robust earnings and outlook. In our view, this rerating would sustain for companies delivering growth along with strong margins and balance sheets. Post the recent run-ups, we downgrade our ratings on Heidelberg and Deccan Cement to ADD from BUY earlier. We maintain ratings on other stocks. Our top picks in the large-caps space are UltraTech and Dalmia Bharat. Amongst mid-caps, we prefer Birla Corp, JK Lakshmi and Sagar Cements.