Cement - Q1FY22 preview - no stopping! - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Saurabh Dugar, Institutional Research Analyst, HDFC Securities.

- COVID second wave hits utilisation: While cement demand was growing at a stellar pace in H2FY21, it got hit in Q1FY22 as the second wave of the pandemic swept across India, impacting both rural and urban parts. Thus, sales volume fell ~20% QoQ (as against usual trend of 5-10% fall). Sales were largely hit in April and May, with recovery in June as lockdown restrictions were eased across India. Thus, utilisation fell to ~72% (second lowest for a June-quarter in the past many years; Jun-20 was the lowest ever at 52%). On the low base of Jun'20 quarter, we estimate industry volume to recover ~40% YoY. As per our channel checks, sales in the east market were less impacted and, hence, declined at a slower pace QoQ.

- Pricing discipline amidst weak demand: In the north and central regions, cement prices held on to the price increase seen during late-Feb and March. Thus, Q1FY22 prices in these markets have increased ~3% QoQ. The west and south regions continued to see price hikes in April and May (with marginal softening in June), thereby buoying regional prices in these markets by ~7% QoQ. Better demand in the east helped the sharp increase in prices in April and their sustenance thereafter, leading to the ~7% QoQ rebound. Thus, pan-India, average prices firmed up 5% QoQ, despite the sales losses.

- Healthy pricing offset lower utilisation and cost inflation: We expect the average NSR for our coverage universe (14 companies) to rise 5/2% QoQ/YoY. This should totally offset ~6% QoQ opex inflation on account of negative op-lev (~12% QoQ fixed cost increase on lower utilisation) and input/fuel cost inflation (~4% QoQ on soaring fuel prices). Thus, unitary EBITDA firms up 1% QoQ to ~INR 1,250/MT (the 6th consecutive quarter of > INR 1,000/MT).

- Performance of companies: We expect aggregate revenue/EBITDA/APAT our coverage universe to fall 17/20/34% YoY in Q1FY22E. On a low base, we expect aggregate revenue/EBITDA/APAT to rise 47/35/44% YoY. We estimate Deccan Cement, ACC, and Ambuja would deliver < 15% volume decline (better than industry's). On the margin front, we estimate UltraTech, Ambuja, Dalmia, Shree, Ramco and Star Cement would deliver unitary EBITDA of > INR 1,200/MT.

- Sector outlook and recommendation: Cement demand is picking up again June onwards. Good demand and increased consolidation is helping the industry to pass on cost inflation. Fuel cost continues to rise unabated - pet coke prices are up 11% QoQ and ~85% YoY. Imported coal prices are up 15-22% QoQ (~75% YoY). Even diesel prices have shot up 6/28% QoQ/YoY. Thus, we expect unitary EBITDA to cool off to ~INR 100/MT in FY22E. We have revised our FY22/23E estimates for a few companies, factoring in pricing and cost trends, and introduced FY24E estimates. We have rolled forward our valuations on Jun'23E (vs Mar'23E earlier). Post the sharp run-up in stocks, we downgrade our ratings on Ambuja, Dalmia and JK Cement to ADD (from BUY earlier), while we maintain our ratings for the rest. Our top picks are - UltraTech (in large caps) and Birla Corp (in mid-caps).

Source : Equity Bulls

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