Published on 9/07/2020 1:43:37 PM | Source: Emkay Global Financial Services Ltd.

Cement Sector Update - High cement prices to help Q1; muted performance for tiles per plywood By Emkay Global

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High cement prices to help Q1; muted performance for tiles/plywood

* Sales volumes impacted by lockdowns; recovery seen in May/June:Sales volumes in Q1 wereimpacted by the nation-wide lockdown and our channel checks indicate sales volumes to beat 10-30%  of  normal  volumes  in  April.  Post  easing  of  lockdown  norms,  demand  recovery was  better  than  anticipated  in  May/June,especially  in  North,  Central  and  East  regions.  We expect an aggregate volume decline of 30.3% yoy for our coverage universe. We expect volume to decline 19-21% yoy for Shree Cement, JK Lakshmi Cement, JK Cement and Prism Johnson. We expect a 29-33% yoy volume fallfor ACC, Ambuja, UltraTech, Ramco and Birla Corporation. In the South/West regions,we expect a 42%/52% yoy volume decline for Orient Cement/India Cements. Star Cement should see a volume drop of 39% yoy. 

* Cement  prices  improve  across  regions  in  Q1:Our  channel  checks  indicate  that  average cement prices pan-India rose 7.2% qoq in Q1, driven by a 12.6% increase in the South region, 7.7% in the Central region, 5-6% in the North/East regions and 3.9% in the West region. We believe  that  cement  price  was  up  1% yoy  led  by a 5-6%  increase  in  the  North/South  regions and  1% in the Central region. The average price in the  East/West regions was down 5%/2% yoy in Q1. Average realization of companies under our coverage is expected to improve to 2% yoy/7%  qoq  in  Q1FY21. We  expect  South-centric  players  with  higher  exposure  to  Andhra Pradesh/Telangana markets to benefit from improved prices in these markets during Q1. As per our  channel  checks, the average  price  in  AP/Telangana  marketswas  up over 20%  qoq  and hence, Orient Cement under our coverage should benefit. 

* Opex  to  increase  on  high  fixed  costs;  but increasedcement  prices  to  arrest  fall  in EBITDA/ton:Opex  during  Q1 should increase due to lower sales volumes and higher diesel prices  despite  cost  saving  measures  takenby  companies. We  have  assumed  absolute  fixed cost reduction of 7-8% qoq and variable cost reduction of Rs40-60/ton for companies under our coverage. Average Opex/ton for coverage companies is expected to increase by 4%  yoy/7% qoq.  Average  EBITDA/ton  is  expected  to  decline  by  mere  8.5%  yoy  (but,  up  5.7%  qoq)  to Rs1,142/ton  despite  lower  volumes  as  the  companies  will  benefit  from  higher  realization. Aggregate EBITDA of our coverage universe is expected to decline 36.2% yoy on lower volumes with  152bps  yoy  fall  in  OPM.  Among  our  coverage  companies,  we  expect EBITDA/ton to improve  by 11%/18%/25%/5%  yoy  for  Shree  Cement/JK  Lakshmi/Orient/Birla  Corp.  India Cements should report a 61% yoy fall in EBITDA/ton on lower volumes. 

* Building materials: In the tiles sector, we expect a 60-63% volume decline yoy for both Kajaria and Somany Ceramics as the utilization rate was at mere 30-35% in May and 60-65% in Juneafter almost nil volume in April. We expect a 69% fall in revenue for Century Plyboards as the recovery  in the Plyboard/MDF  segment  has  been  delayed.  We  expect  these  companies  to report EBITDA losses in Q1 despite cost savings initiatives. Prism Johnson too is expected to report a loss in the TBK segment. 

* Key factors to watch out for:Recovery in cement demand has been much better compared to our/industry expectations. We need to monitor sustainability of the demand for the next few months. Cement prices have softened in Juneand the trend needs to be observed. 

* EAP  position:In  our sector  EAP,  we  are  OW  on  ACC, Ambuja,  UltraTech,  JK  Lakshmi  and Birla Corp., while UW on Shree Cement, Ramco Cements and Grasim Industries.


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