Cement Sector Update - Seasonal impact persists By Emkay Global Financial Services
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Monthly Update: Seasonal impact persists
* Our channel checks suggest that average pan-India cement prices fell 1-2% MoM (~Rs6/bag) and were up 1-2% YoY in Aug-22. Prices fell 3-4% MoM in the North and East, by 1% in West and Central India, and were broadly flat in the South.
* Industry volumes are likely to have risen by a low single-digit YoY, while waning by a mid-single-digit MoM in Aug-22, given the accelerating monsoons, the harvesting season and restriction on sand-mining in several states, which see heavy rains.
* Operating costs should peak in Q2FY23 and are expected to decline in coming quarters, with international petcoke prices down ~40% in the past four months to US$175/ton. Factoring-in the inventory lag (45-90 days), CC ratio of 1.5x and the petcoke usage (~70% in fuel mix), the dip in fuel prices is expected to provide cost savings of at least Rs200/ton from Q3, in our view.
* Large-cap stocks (except Ambuja) are largely flat, while mid- & small-cap stocks are up 5-10% in the past one month. We continue to favor UltraTech and Shree Cement among large-caps. We also like Birla Corp among mid-caps and Sagar Cements in the small-cap space.
* Our channel checks suggest average pan-India cement prices declined 1-2% MoM (~Rs6/bag) and were up 1-2% YoY in Aug-22. On MoM basis, prices fell by 3-4% in the North and East, by 1% in the West and Central region, and were broadly flat in the South. On YoY basis, prices are largely up 1-2% YoY pan-India ? up 2-5% in Central, West and North India and down 3-4% in the South and East.
* On QTD basis, pan-India prices are expected to decline by 5-6%, with a likely 6-9% fall in North, East and Central India and a 2-4% drop in the southern & western regions
* Industry volumes likely increased by a low single-digit YoY, mainly led by growth in the South and East. However, volumes possibly declined by a mid-single-digit MoM, given the increasing pace of monsoons, the harvesting season and the restriction on sand-mining in several states that witness heavy rains.
* Cost pressure expected to ease in coming quarters: International petcoke prices have corrected by ~40% in the past 4 months to US$175/ton (Rs2.13/Kcal on landed basis). Similarly, domestic petcoke prices have corrected by ~30% in the past 3 months to Rs15,699/ton in Sep-22. Assuming clinker:cement ratio (CC) of 1.5x, 70% petcoke usage in fuel mix & 45-90 days of fuel inventory, we believe the drop in fuel prices would offer cost savings of at least Rs200/ton (~Rs10/bag) from Q3FY23.
* In Q1FY23, our coverage universe (10 companies, ~60% of overall capacity share) reported a 17% YoY/6% QoQ decline in EBITDA, owing to higher input cost inflation. Average EBITDA/ton was lower by 30% YoY (Rs425/ton)/flat QoQ at Rs1,013. On aggregate, we broadly maintain our EBITDA estimates for FY23-25.
* Our medium-term upcycle thesis remains largely intact, albeit with a more gradual reset in profitability (RoIC), underpinned by improving demand-supply dynamics, better price discipline, cost optimization, and de-risking efforts. Key downside risks: 1) Lowerthan-expected demand growth; 2) Any negative outcome from the CCI investigations.
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