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Cement - Strong demand; rising costs to hit margin - HDFC Securities

Posted On: 2021-10-18 11:45:02 (Time Zone: IST)

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Keshav Lahoti, Institutional Research Analyst, HDFC Securities

Demand recovery continues post COVID second wave impact: Cement demand picked up Jun-21 onwards, as COVID impact started to recede. Subsequently, we estimate our coverage universe (15 companies) to deliver 4% QoQ volume growth in 2QFY22 (on a lower base of Q1), leading to 11% jump YoY. Thus, average utilisation should recover to 75% vs 72/70% QoQ/YoY.

Seasonal price correction: We estimate the average NSR of our coverage universe in 2Q would fall 3% QoQ, mainly on account of monsoon impact. On a YoY basis, we estimate NSR would remain higher by ~2%. On QoQ basis, our channel check suggests cement prices corrected ~4% each in east and south regions, followed by ~3% fall in north and flattish in central and west regions.

Rising fuel and diesel prices to inflate operating costs: While pet coke prices have surged another 20% QoQ (~double YoY), imported thermal coal prices have also spiked up by 33% QoQ (~140-150% YoY). Rising crude prices have pushed up diesel prices by 7% QoQ (+20% YoY). Thus, we have built in ~INR 80-100/MT input cost inflation and ~INR 20-40/MT freight cost increase QoQ for our coverage universe. Subsequently, we estimate unitary opex to firm up 3/8% QoQ/YoY, pulling the margin down. We estimate average unitary EBITDA would fall 19/13% QoQ/YoY to INR 1,117/MT.

Performance of companies: We expect aggregate revenue for our coverage universe to rise 14% YoY on higher volumes in 2QFY22E. However, we estimate EBITDA/APAT would fall 3/6% YoY on account of rising costs. We expect Orient Cement, UltraTech, Ambuja, and Nuvoco to deliver EBITDA growth YoY. We expect all other companies to deliver an EBITDA decline YoY (on their high bases), barring ACC (flattish EBITDA).

Sector outlook and recommendation: Cement demand is recovering well; this has supported limited price correction during the monsoon period. We expect cement prices to rise during H2FY22, as cost inflation is firming up unabated and has impacted the whole industry. Good demand and increased consolidation should support the industry's cost pass through ability. Thus, despite the rising cost pressure, we expect average unitary EBITDA for our coverage universe to remain flattish YoY at ~INR 1,210/MT in FY22E (vs INR 1,230/MT in FY21), owing to a healthy pricing outlook. We roll forward valuations to Sep'23E (vs Jun'23E earlier). Post the sharp run-up in stocks, we downgrade our ratings on Sagar Cements to ADD from BUY earlier. We also upgrade Ramco Cements to ADD from REDUCE earlier, owing to comfortable valuations. We maintain our ratings for the rest. Our top picks are - UltraTech (in large caps) and Birla Corp and Nuvoco Vistas (in mid-caps).

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