Cement - Jan-Mar'22 Earnings Preview - Higher costs continue to hurt earnings

Mr. Kamlesh Bagmar- Deputy Head of Research at Prabhudas Lilladher

EBITDA of our Cement coverage universe is expected to fall by 25% YoY, entirely due to contraction in margins. Volumes would increase by 1.2% YoY amid high base of 24% YoY growth. Realisations are expected to increase by 4.4% YoY/Rs210/t (down 0.3%/Rs15/t QoQ). Impacted by steep increase in coal, packaging and freight cost, overall cost is expected to increase by 16% YoY/Rs600 per ton. This would result in sharp contraction in EBITDA/t of our cement coverage universe by 26% YoY/Rs325 at Rs915.

We believe that outlook on sector's earnings growth with an estimated CAGR of 8% (largely driven by volume growth) in FY22-FY24e looks unattractive given the current valuations. We cut EBITDA estimates of our coverage stocks by 4.8%/11.8% for FY22e/FY23e due to higher costs and lower margins. We downgrade rating on Ambuja cement (ACEM) to Accumulate with revised TP of Rs360 (earlier Rs390) on account of limited upside and steeper earnings cut. While, we continue to prefer Ultratech (UTCEM) (with revised TP of Rs7,180) due to its dominant size of operations (enjoys leadership position with 22% market share), continuous capacity growth and efficient operations.

Price hikes restricted to East region: All India cement prices remained unchanged QoQ (+6.6% YoY/Rs22) due to price hike in East, offset by drop in prices in rest of the regions. East witnessed steep increase of Rs25 per bag QoQ while rest of the regions did not see any meaningful price increase. Prices reduced by Rs5/Rs4/Rs3 per bag QoQ in South/North/West. Prices in Central region remained flat QoQ.

• North - Prices stuck in range for long: Despite better demand, prices in North region witnessed fall of Rs4/bag QoQ due to slow demand and high competition.
• Central - Prices hikes remain muted: Prices in the region remain fattish QoQ. Soft demand (due to state elections in UP) and continuous surge in supplies from East and North regions kept prices under pressure.
• South - Prices fell by 2% QoQ: Region witnessed steep price hikes of Rs15-20/bag at the beginning of quarter. However, prices could not sustain and settled down with fall of Rs5/bag QoQ due to intense competition for higher market share in wake of better demand. Karnataka/Tamil Nadu witnessed steep fall of Rs20/Rs8 QoQ while AP/Telangana witnessed hike of Rs6/bag.
• West - Prices dropped marginally: Region's average fell by Rs3/bag QoQ, largely due to fall in Gujarat prices. Prices in Maharashtra remained unchanged QoQ. While prices in Gujarat fell by Rs5/bag.
• East - Only region to see increase in prices: In the wake of unsustainable price levels, region's average prices increased by Rs25/bag QoQ. Prices in West Bengal/Odisha/Bihar increased sharply by Rs34/Rs28/Rs18 per bag QoQ

Source : Equity Bulls

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Cement Q4FY22 EarningsPreview PrabhudasLilladher