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Strong volumes to drive earnings

Cost inflation to be largely offset by operating leverage gains

* We estimate our Coverage Universe to post 24%/31%/52% YoY growth in revenue/EBITDA/PAT, led by strong volumes (73mt, +22% YoY) on a low base.

* While pan-India average cement price in 4QFY21 was flat QoQ, it is still up 3% YoY, led by price hikes across regions in March. We estimate our coverage realization to rise by 2% YoY (flat QoQ) to INR4,950/t.

* On a YoY basis, operating leverage benefit (from higher volumes), coupled with higher realization, should offset the rise in fuel costs resulting in 7% YoY increase in estimated EBITDA per ton to INR1,156/t. EBITDA/t is, however, expected to drop marginally by 4% QoQ due to higher fuel and freight costs.

Volumes up 22% YoY (on low base), led by East, North, and Central

* Cement industry volumes have continued to recover, led by a strong uptick in urban real estate and infrastructure activity. A lower base, due to lockdown in Mar’20, has also contributed to higher growth.

* As per our channel checks, demand remained strong in East, North, and Central, while it showed signs of revival in West. South, however, remained weak with ~10% YoY decline.

* In 4QFY21, we expect volumes to grow 22% YoY / 10% QoQ (supported by the low base of 4QFY20 – volumes declined 13% YoY on government-mandated lockdown in Mar’20).

* JK Cement, particularly, is expected to report very strong volume growth (+44% YoY), supported by a ramp-up in new capacities. Improved capacity utilization should aid volume growth of 26–28% in UTCEM/DBEL. We expect volume growth of 17–20% for other players under our coverage – except India Cements (1% YoY) and Ramco (7% YoY), due to their high exposure in South.

Prices rise in South/West, but decline in East

* Pan-India average cement price has been 3% YoY higher in 4QFY21, led by a 13%/5% increase in South/West and 2% in North and Central, while East was down 6%.

* Pan-India average price, however, has been flat QoQ – Central/East/South posted decline of 1%/1%/2%, North remained flat, while West was up 2%.

* In East, Bihar/Jharkhand posted decline of 5%/2% QoQ, while West Bengal was up 5% QoQ. Prices in Central came in flat (down 1% QoQ) on account of marginal decline (1% QoQ) in Madhya Pradesh.

* Prices in South were down 2% QoQ on 6%/2%/2% QoQ decline in Kerala / Tamil Nadu / AP & Telangana. Prices in West were up 2% QoQ on account of a 4% QoQ increase in Gujarat. We expect average realization for our Coverage Universe to be up 2% YoY to INR4,950 (flat QoQ).

Operating leverage to offset fuel cost inflation; EBITDA/t up 7% YoY

* Lower energy price had been a tailwind for the Cement sector up to 2QFY21. However, this has now reversed as energy prices have risen substantially. During the 4QFY21, domestic pet-coke and diesel prices stood higher by 15%/9% QoQ. We estimate INR70-100/t QoQ inflation in power & fuel and freight costs in 4QFY21. This would be partially offset by operating leverage gains from higher volumes as fixed cost absorption should be better.

* We expect total cost per tonne for our Coverage Universe to edge up 1% YoY (+1% QoQ) to INR3,794 on higher fuel costs (+6% YoY / +8% QoQ).

* EBITDA/t for our Coverage Universe should increase 7% YoY to INR1,156 due to better realization YoY, but should be down 4% QoQ on higher cost.

Top picks – UltraTech, Dalmia Bharat and JK Cement

* While we are structurally positive on the industry outlook, we prefer North and Central as these markets have a higher clinker utilization of over 80%.

* We adopt a bottom-up stock-picking approach and prefer companies that: a) are moving down the cost curve, b) have the potential to gain market share, and c) provide valuation comfort.

* UltraTech is our top large-cap pick and DBEL and JK Cement are our top midcap pick. We also like ACC as a value pick, but do not see much upside in Shree, Ramco, and Ambuja, whose potential market share gains are already priced in.

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