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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