Cement - Prices resilient in Q3; consensus upgrades to continue - ICICI Securities

Our channel checks suggest industry demand likely grew in mid-single digit YoY during Oct-Nov'20 led by >10% YoY growth in North, Central and East regions, while South still continues to decline YoY with West region may be broadly flat YoY. Unlike previous years, which usually witnessed 2-4% QoQ price decline in Q3, average prices are resilient and broadly trending flat QoQ in Q3FY21 till date. On a YoY basis, average pan-India prices are up 7% YoY in Nov'20 led by 18% YoY rise in South and 4-8% YoY increase in North, Central and West regions with almost flat prices YoY in East. Consensus FY21E / FY22E EBITDA has been upgraded by 25%/15% over the past five months and we see an upside risk to these estimates. SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL.

- Industry volumes expected to grow in mid-single digit YoY during Oct-Nov'20 (our estimate) with pan-India utilisation at ~73%. Given the shift in festive holidays to Nov'20 this year, combining Oct-Nov volumes together will be better for more meaningful comparison. While rural and semi-urban housing demand continues to drive growth, pick-up in government-led infrastructure and non-trade demand likely aided growth. Pent-up urban demand (mostly non-trade), especially in South and West, may improve going ahead with gradual return of migrant workers. We continue to factor in low single digit decline in industry volumes for FY21E since Apr'20 vs consensus view of at least low double-digit decline.

- Average pan-India prices up 7% YoY during Nov'20 led by ~18% YoY increase in South. Prices are up 4-8% YoY in North, Central and West and almost flat YoY in East during Nov'20. Companies may partially switch to coal owing to sharp increase in pet coke prices, which may restrict power and fuel costs/te increase to 10% and overall costs/te are still likely to be broadly flat YoY in H2FY21E. Accordingly, companies may report strong 30-35% YoY EBITDA growth in H2FY21E led by 10%/5% YoY volume/realisation growth, respectively.

- Stocks rally backed by strong earnings growth/visibility; sector outperformance to continue: Average EBITDA/te for the sector grew by 30% in FY20 which further increased by 20% in H1FY21 led by firm prices and lower costs, despite weak volumes. With improving volume / prices, investors are likely to get more convinced about sustainability of these EBITDA/te for the sector (except South region).

- We prefer companies with higher volume growth visibility and higher exposure to North and Central regions as demand improvement amidst delay in clinker additions (by UTCEM in Central and ACEM in North) would likely lead to >90% utilisation in these regions during H1CY21 and may lead to strong prices /margins.

Source : Equity Bulls

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