Cement - Demand seems improving; prices to follow - ICICI Securities

As per our channel checks, demand seems to be improving in Mar'22 and may see >17-18% MoM and low-single digit YoY growth after having declined marginally YoY for the past three months. Industry may post highest-ever volumes in Mar'22 (~38mnte) with 91% utilisation despite high base of Mar'21, in our view. We believe Q1FY23E may see stronger 10-15% YoY demand growth aided by low-base of Q1FY22 impacted by second covid wave. While average pan-India prices are up 5% YoY in Q4FY22, they would still likely fall short of sharp cost increases YoY. Besides, current average fuel prices (which would impact in Q1FY23) are still ~30% higher than Q3FY22 fuel consumption rate necessitating further ~Rs40/bag (10%) QoQ price hike in Q1FY23E which remains a key trigger for the sector. UTCEM, ACEM and SRCM remain our top picks. We also like JKCE and TRCL. Key risks: Lower demand / prices and sharp costs escalations.

- Key investor concern and reason for sector underperformance - Why sector has not been able to pass-on cost increases? In our view, 1. cost increases have been sharp to the extent of ~Rs450/te (12-13% YoY) in FY22 due to doubling of average fuel prices YoY and sharp diesel and other cost increases. 2. demand in East and Central regions was impacted in H2CY21 due to unseasonal rains, unavailability of sand etc not allowing sufficient price hikes in those regions, and 3. Average South prices remained broadly flat YoY for full FY22 as prices were already hiked by 15% YoY in FY21.

- What may change? 1. Demand may improve (as seen in Mar'22) owing to higher government spend on infrastructure and housing (especially in last two years before general elections). 2. Cost increases may be transient - fuel price increases have mostly been reversed over 4-6 quarters historically (2011, 2014, 2019); and 3. price increases are usually more durable and sustainable. Sharp price increase of ~Rs40/bag in Apr'22 to mitigate cost escalations cannot be negated, in our view.

- Stocks are now pricing no / low EBITDA growth over FY23-24E vs 10% EBITDA CAGR over past decade: While rising input costs pose downside risks to our / consensus earnings, risk-reward is turning favourable (post up to ~25% stock price correction over the past four months), in our view.

- Mar'22 volumes likely improving; Q4FY22 may see lower 1-2% YoY decline vs 4-5% decline expected earlier. Except East, all other regions are likely to see YoY growth in Mar'22. South is likely to post low double-digit YoY growth in Q4FY22. Hence, Q4FY22 industry volumes may see marginal fall YoY (vs 4% YoY decline seen during Q3FY22) and may grow 17-18% QoQ (vs historical average of 12-13% QoQ).

- Q4FY22 average pan-India prices likely up 1-2% QoQ and 5% YoY but unlikely to offset cost escalations YoY. Prices in North, Central and West regions (which did not see any meaningful price hikes in Jan-Feb'22) have been hiked by Rs10-12/bag MoM in Mar'22; while other regions are holding onto price hikes implemented in Jan-Feb'22. While average pan-India prices are likely up by Rs25/bag from the exit of Dec'22, they are broadly flat QoQ across most regions except East, owing to 2-3% QoQ price increase seen during Q3FY22. East region, which declined 4-5% QoQ in Q3FY22, has seen similar reversal (up 4% QoQ) in Q4FY22. On a YoY basis, average pan-India and most regions prices are up 5% with North, Central and East regions being up 4-5%, West up 8% and South flat during Q4FY22.

- Q4FY22 average EBITDA/te may inch up by Rs100/te QoQ; although likely to be down by Rs150/te. We expect minimal QoQ increase in power and fuel costs/te in Q4FY22 owing to lower fuel prices in Nov-Dec'21. Even average diesel prices are down 2-3% QoQ in Q4FY22. Besides, 17-18% QoQ volume increase would provide operating leverage on a QoQ basis. Hence, margins (EBITDA/te) may bottom out in Q3FY22, in our view. However, on a YoY basis, fuel price increases would still be substantial and unlikely to be offset by price hikes in Q4FY22. Overall, there seems no major change in our expectations for Q4FY22E earnings.

Source : Equity Bulls

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Cement ICICISecurities Demand