Cement - Outlook CY21: Earnings upgrade to continue - ICICI Securities

We continue to maintain our positive stance for CY21 as we expect consensus earnings upgrade to continue. Industry average EBITDA/te grew 25% YoY in FY20, which further rose 20% YoY to >Rs1,250/te in H1FY21. With improving volumes / prices, investors are likely to get more convinced about the sustainability of these profitability. Consensus FY21E / FY22E EBITDA has been upgraded by 25% / 15% during H2CY20; our estimates are ~10% ahead of consensus (refer table 2). SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL.

Key trends for CY21

- Demand recovery likely to be robust with 13-14% YoY growth for FY22E on a low base (2-3% YoY decline in both FY20 and FY21E), resulting in 6% CAGR over FY20-22E. Rural and semi-urban housing coupled with government-led infrastructure will be the key demand drivers. East, Central and South are likely to lead demand growth, also aided by elections in West Bengal, Uttar Pradesh and Tamil Nadu.

- Capacity additions to grow at 4% CAGR over FY20-23E: 60% of 33mnte clinker and 70mnte cement capacities (including ~10mnte likely to be announced soon) are planned to be added in high-growth markets of East and Central regions over FY20-FY23E and 50% of these capacities are expected towards the end of FY23E. Huge divergence in regional growth during FY20-21E has resulted in North, Central and East operating at 85% utilisation in FY21E from 80% in FY19; while utilisation of South and West has likely declined from 70% in FY19 to current ~60%.

- Industry consolidation to increase further with share of top six companies in the respective regions ex-South likely to increase from 67-80% in FY19 to 77-85% by FY23E. A few more M&As (including that of JPA) may result in further consolidation.

- Prices may further increase in North and Central in FY22E led by increasing utilisation and higher consolidation. However, prices in East may remain under pressure owing to fight for market share. Prices in South rose sharply by >10% in FY21E till date, hence are expected to remain volatile. Cost escalations are likely to be passed on and companies may report >15% YoY EBITDA growth in FY22E over ~15% YoY growth in FY21E. Consensus earnings upgrade may continue in CY21.

- Decade of stock price outperformance backed by strong earnings / growth visibility: Sector has outperformed broad indices over the past decade and delivered robust returns, and we expect this trend to continue. UTCEM, SRCM, TRCL and JKCE delivered 17%, 29%, 24% and 30% CAGR returns respectively over past 10 years, and 13%, 18%, 19% and 26% over past five years; they have also outperformed broad indices over past one / two years.

Source : Equity Bulls

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