Cement - Prices rise; earnings upgrade to continue - ICICI Securities

Our channel checks suggest average pan-India cement prices rose ~4% MoM (Rs15/bag or Rs300/te) in the first week of Mar'21 backed by strong demand and the need to mitigate cost escalations. While West and East regions saw average price hikes of Rs10-20/bag, prices rose by Rs5-15/bag in North and Central regions and Rs20-30/bag in South. Dealers indicate companies may announce further hikes in the coming days to ensure sustainability of the current hikes, given year-end pressures to achieve volume targets. We believe recent price hikes would likely alleviate investor concerns on sustenance of margins amid rising cost pressures. Sector is likely to post strong EBITDA growth at >30% YoY in Q4FY21; hence we expect consensus earnings upgrade to continue. SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL. Key risks: lower demand / prices.

- Average pan-India prices up 7% YoY in Mar'21-TD and 5% YoY in Q4FY21-TD: On a YoY basis, Mar'21-TD prices are sharply up 18% in South, 11% in West, 4-5% in North and Central regions, and almost flat YoY in East. Dealers in North and Central regions also indicate non-trade prices have increased sharply by Rs25-30/bag (vs Rs10-15/bag for trade) over the past two months, thus narrowing the differential with trade prices to Rs30-35/bag vs Rs50-60 earlier. Given that this is peak construction period, newsflow on pricing is likely to remain firm over the next few months.

- Industry likely to post highest-ever quarterly volumes of ~105mnte (our estimate) with 20-22% YoY growth during Q4FY21E implying ~85% pan-India utilisation. While South seems to be operating at ~70% utilisation, rest of the regions are operating at >95% during Q4FY21-TD. Nearly a third of industry capacities are currently facing clinker shortage / capacity constraints while companies that have expanded recently (40% of industry) would enjoy strong volume growth in Q4FY21E and the balance, mainly in South, have surplus capacities. Industry is likely to post strong >15% YoY volume growth for FY22E, aided by low FY21 base (flat YoY), increased government thrust on infrastructure and extrapolating Q4FY21-TD demand trends.

- Industry may post >30% YoY EBITDA growth in Q4FY21. EBITDA/te may grow 7-8% YoY and remain broadly flat QoQ in Q4FY21. On a YoY basis, Q4FY21-TD prices are sharply up 15% in South, 8% in West, 2-3% in North / Central regions and are still down 3% YoY in East. On a QoQ basis, average Q4FY21-TD pan-India prices are broadly flat. With improving volumes, utilisation and prices, and high industry consolidation, we expect cost escalations to be passed on and investors to get more convinced about sustenance & improvement of the sector's current profitability (which is up ~50% over past two years).

Source : Equity Bulls

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