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Published on 28/11/2020 11:13:26 AM | Source: Emkay Global Financial Services Ltd

Cement Sector Update - Q2FY21 Preview: Volume likely to improve; cost saving to help margin improvement By Emkay Global

Posted in Broking Firm Views - Sector Report| #Cement Sector #Emkay Global Financial Services Ltd. #Sector Report

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Q2FY21 Preview: Volume likely to improve; cost saving to help margin improvement

* Sales volume expected to improve, except for South-based companies: We expect aggregate sales volume of our coverage universe to improve 3.4% yoy on a better demand scenario in the North, Central and East regions. Our channel checks had indicated demand improvement in these regions in Jul’20 and Sep’20. We expect volume to decline 20-23% yoy for South-based companies (Ramco, India Cements and Orient Cement) as demand remained under pressure in the South and West regions in Q2. JK Cement is expected to report 25.6% yoy growth in Grey cement volume, benefiting from capacity expansions in the North region. Shree Cement is likely to report 13% yoy volume growth led by improvement in sales in the East region and higher volume from the South plant. For other companies under our coverage universe, we have assumed volume growth of 2-8% yoy.

 

* Cement prices decline sequentially across regions: Our channel checks indicate that average cement prices pan-India fell 3.7% qoq, with 4-5% decline in the North, Central, East and West regions. Prices in the South region declined 2.1% qoq. We believe that prices are still up 1.7% yoy led by the South region (up 10.7% yoy). Average realization of companies under our coverage is expected to improve to 1.7% yoy, but there will be a sequential drop of 3.2%. South-centric players with high exposure to Andhra Pradesh and Telangana markets will continue to benefit from strong cement prices (our channel checks indicate that the average price in these markets is up 26% yoy). Orient Cement will be the biggest beneficiary in our coverage universe followed by Sagar Cement and NCL Industries (not under coverage), among others.

 

* Costs-saving initiatives to drive strong margin expansion: We expect the average operating cost of our coverage universe to decline 3.4% yoy due to cost-saving initiatives like reduction in AD spends, fixed costs, negotiation of rents, office and travel expenses. Most of the companies had mentioned after Q1 results that some cost savings they achieved are sustainable in nature. Average Opex/ton for coverage companies is expected to decline 3.4% yoy (0.7% qoq).

We believe that lower opex and higher cement prices will lead to 3.4pp yoy improvement in OPM and a 19.7% yoy increase in EBITDA/ton (down 13.4% qoq). For our coverage universe, we expect aggregate EBITDA growth of 19.3% yoy/19.6% qoq. Among bigger companies, we expect 50%/56% yoy EBITDA/ton growth for Ambuja/Ramco. ACC and UltraTech should witness EBITDA/ton growth of 13-18% yoy, whereas we expect a 14.3% yoy decline for Shree Cement. EBITDA/ton of Orient Cement should improve 2.6x yoy.

 

* Building materials: Recovery in other building materials (Tiles and MDF) too have been much better than expectations after a severe drop in Q1 sales. We expect an 8-10% volume decline for Kajaria and Somany Ceramics. MDF demand has remained strong in Aug-Sep’20 and we assume 5% yoy growth in revenues in this segment for Century Plyboards (CPBI). We assume a 10-19% yoy decline in the other business segment of CPBI. We assume 15-17pp qoq OPM margin improvement (but, down 70-300bps yoy) for Kajaria/Somany Ceramics and 12pp qoq improvement for CPBI.

 

* Expectations after Q2 results and key surprise factors: We believe that there should be further earnings upgrades for our coverage universe. Demand recovery has surprised positively and we expect government-led infrastructure projects to further drive demand momentum. We expect cost-saving strategies to continue to benefit in Q2 and a sudden reversal in other expenses/employee costs may led to negative surprises in Q2FY21.

 

* EAP position: Our top pick remains UltraTech followed by Birla Corporation, JK Cement and JK Lakshmi Cement. In our sector EAP, we are OW on ACC, Ambuja, UltraTech, JK Cement, JK Lakshmi and Birla Corp., while EW on Shree Cement and Ramco Cements, and UW on Grasim Industries

 

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