Cement - Demand improves in Sep'20; prices to follow soon - II - ICICI Securities

Management as well as consensus commentaries on FY21E demand outlook are likely to turn incrementally positive with Sep'20 posting sharp ~20% MoM / >10% YoY growth. Consensus may still not be factoring-in the impact of low base for Mar'21E, which may see 55-60% YoY reported growth and hence add ~5% to annual growth. We continue to factor-in low single-digit decline in industry volumes for FY21E vs consensus view of at least low double-digit decline. Given weak exit pricing due to monsoon and mounting cost escalations, companies have announced price hikes of Rs10-30/bag across most regions w.e.f. Oct'20. We see possibility of partial price hike absorption during Q3FY21E and expect sustainably firm prices during Jan-Jun'21E. SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL.

- Industry volumes likely grew >10% YoY to ~28mnte during Sep'20 (our estimate) with pan-India utilisation at ~70% led by robust pick-up in construction activities post monsoon across most regions. Extended monsoon in Sep'19 and a sharp 50% YoY demand decline in Andhra Pradesh / Telangana (AP/T) resulted in strong YoY growth. While rural and semi-urban housing demand continues to drive growth, pick-up in government-led infrastructure / low-cost housing aided growth in Sep'20. Pent-up urban demand and non-trade demand, especially in South and West, are likely to improve going ahead with the gradual return of migrant workers.

- Huge divergence in regional growth: Volumes in North, Central and East regions (least impacted by Covid) remained strong with >20% MoM and 10-15% YoY growth aided by pick-up in non-trade demand as well. South likely grew in mid-single digit YoY on a low base (-25%) supported by election-led spending in Tamil Nadu and rise in government projects in AP/T. Gujarat likely saw sharp 40-50% MoM growth owing to pent-up demand with migrant workers returning while Maharashtra probably witnessed only marginal MoM growth and is still down significantly YoY. Overall, the industry may see 1-2% YoY growth during Q2FY21E with North, Central and East regions growing 7-9% YoY with South and West still down 12-14% YoY.

- Average pan-India prices up 1% YoY during Sep'20 led by ~6% YoY increase in South. Prices were up 2-3% YoY in North and West and down 2-3% YoY in East and Central regions during Sep'20. On a MoM basis, South and West saw ~Rs10/bag price decline while prices in other regions were broadly flat MoM.

- Domestic petcoke prices rose by Rs702/te w.e.f Oct'20. Overall, domestic petcoke / diesel prices are up 17% and 13% respectively QoQ and are up 5-14% YoY. Overall cost increases are still likely to be contained, given improving efficiencies, structural fixed cost rationalisation, and better operating leverage.

Source : Equity Bulls

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