Cement: Expect Ebitda growth of 25% y-o-y in Q3

Our channel checks suggest industry demand likely grew in low single digit y-o-y during Dec’20, while average pan-India prices corrected 3-4% m-o-m (still up 5% y-o-y) owing to volume push (by calendar year-end companies) and fight for higher market share. Volumes and prices both are likely to be up 5-6% y-o-y during Q3FY21e, which would drive >25% y-o-y Ebitda growth. Key trigger to watch out for would be seasonal price hikes which usually start from mid-Jan’21 as peak construction period sets in and also necessitated this time by cost escalations. We remain optimistic about the imminent price hikes. SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL.

Industry volumes expected to grow 5-6% YoY during Q3FY21e to 91mnte (our estimate) with pan-India utilisation at ~75%. While the first half of Dec’20 was weak in terms of demand, it gained momentum during the second half. Overall, North, Central and East are likely to see >10% y-o-y growth during Q3FY21 while we expect South to post 7-8% y-o-y decline and West to be broadly flat y-o-y. Low base of Mar’20 would result in strong mid-teens y-o-y growth during Q4FY21e. We continue to factor in low single-digit decline in industry volumes for FY21e (since Apr’20).

Average pan-India prices up 5% y-o-y in Dec’20 led by 18% y-o-y rise in South and 3-5% y-o-y increase in West, North and Central regions. Prices corrected sharply in East by Rs 15-30/bag m-o-m and are down 7% y-o-y to almost 3-year lows. On a m-o-m basis, prices corrected by 3-4% across most other regions.

Average pan-India prices up 6% y-o-y during Q3FY21 led by 18% y-o-y rise in South and 4-6% y-o-y increase in West, North and Central regions while prices in East are down 4% y-o-y. On a q-o-q basis, average pan-India prices are likely down ~3% q-o-q led by 5% q-o-q correction in South, West and East, while prices in North and Central regions are almost flat q-o-q.

Companies may report strong 25-30% y-o-y Ebitda growth in H2FY21E led by 11%/5% y-o-y volume/realisation growth. Overall costs/te would turn almost flat y-o-y in H2FY21e owing to various input cost escalations compared to 4-5% y-o-y decline reported in H1FY21. Key trigger to watch out for would be seasonal price hikes which usually start from mid-Jan’21 as peak construction period sets in and also necessitated this time by cost escalations. We remain optimistic about these hikes.

Sector outperformance to continue: Industry average Ebitda/te grew by 25% in FY20, which further increased by 15% in H1FY21 to >Rs 1,250/te led by firm prices and lower costs despite weak volumes. With improving volumes and prices, investors are likely to get more convinced about sustainability of the sector’s current profitability.