Healthy NSR to offset volume loss impact - Q4FY20 Result Preview: Cement - HDFC Securities

Sales hit hard in the peak quarter: The Covid-19 led countrywide shut downs in late March pulled down cement sales during 4QFY20. We estimate sales volume for our coverage universe to fall 10% YoY (+2% QoQ). In our view, the lockdown eroded ~15-20% of expected sales for 4QFY20.

Strong pricing continues in NCG mkts: Cement prices recovered a healthy 4-5% QoQ across all markets barring south (+2% QoQ). This kept North/Central/Gujarat (NCG) markets' realization up ~10%+ YoY. At the same time, prices in South/East fell 6/3% YoY while it remained flattish in Maharashtra. Average NSR for our coverage universe is expected to grow 4/2.4% YoY/QoQ, buoyed by robust price growth in NCG markets.

Strong margins to offset weak vol impact in 4QFY20: Cement price gain QoQ across India amid stable input costs should drive margin expansion QoQ. We estimate avg unitary opex to remain flattish QoQ. On YoY basis, we estimate 2% hike in opex owing to negative op-lev despite lower input costs. Thus, we estimate average unitary EBITDA in 4QFY20 to firm up 13/13% YoY/QoQ to Rs 1,039/MT - multi-year high levels for Mar-qtr! We estimate all NCG based cos to report EBITDA growth in 4QFY20 despite vol decline, while South/East based companies to report EBITDA decline. We estimate flattish EBITDA YoY for pan India players. Thus, we expect aggregate EBITDA for our coverage universe to remain flat YoY and PAT to fall 4% YoY.

Extended lockdown drives estimates downgrades for FY21/22E: Factoring in Covid-19 led lockdown and subsequent slowdown in sales momentum, we reduce sales vol est for FY21/22E by ~15/10% resp for our coverage universe. We also lower our NSR est by ~1% each for FY21/22E. Lower utilisation should push up unitary fixed costs, but this can be offset by melt down in crude price (which should moderate industry's diesel and coal prices). Thus, we cut our FY21/22E EBITDA estimates for our coverage universe by ~25/15% resp. Subsequently, we also cut TPs for stocks under coverage by 15-25% to factor in the earnings erosion.

Recommendations and stock picks: We upgrade Ramco Cements to BUY (from ADD earlier) and Shree Cement to REDUCE (from SELL earlier), post the recent stock price corrections. We maintain BUY ratings on all other stocks. We prefer UltraTech among pan India players and NCG exposed JK Cement and JK Lakshmi in midcaps. The SEM based companies (especially Dalmia) are also trading at attractive valuations post recent stock decline and should see rerating as demand recovery accelerates in 2HFY21 onwards.

Source : Equity Bulls

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