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Demand surprises; earnings upgrade to continue

Our channel checks suggest better than expected demand trends in Feb’21, with industry likely to post MoM growth (despite three days less) and high single-digit YoY growth. Accordingly, Q4FY21 is likely to see >20% YoY volume growth, also aided by the low base of Mar’20. FY21E is likely to end with broadly flat volumes YoY, despite ~30% YoY decline in Q1FY21. Variable cost increases QoQ are likely to be offset by better operating leverage & cost efficiencies, and the industry may post 25-30% YoY EBITDA growth in Q4FY21E. Average pan-India prices rose 1% MoM (up 3% YoY) with 1-2% MoM increase across most regions except South. We remain optimistic on price hikes, given strong demand, higher industry consolidation and also necessitated by cost escalations. SRCM and UTCEM remain our top picks. We also like ACEM, JKCE and TRCL. Key risks: lower demand / prices.

* Industry volumes expected to grow in high single-digit YoY during Feb’21E to ~34mnte (our estimate) with pan-India utilisation at ~88%. While South seems to be operating at ~70% utilisation, rest of the regions are likely operating at ~95%. North is likely to lead with strong mid-teens YoY growth while we expect East to post doubledigit volume growth. Central and West regions would likely see mid-single digit YoY growth while South would continue to witness mid-single-digit YoY decline. Nearly 1/3rd of industry capacities are likely facing clinker shortage / capacity constraints; while companies that have expanded recently (40% of industry) would enjoy strong volume growth in Q4FY21, and the balance, mainly in South, have surplus capacities.

* Average pan-India prices rose 1% MoM / 3% YoY in Feb’21: Prices increased 1- 2% MoM across most regions except South, which likely saw a marginal decline. On a YoY basis, prices were sharply up 12% in South and 5% in West. Prices are broadly flat YoY in North and Central regions and still down 3% in East. On a QoQ basis, average Q4FY21 pan-India prices till date are likely down 1-1.5%. We remain optimistic on price hikes, given strong demand & also necessitated by cost increases.

* Industry may post 25-30% YoY EBITDA growth in Q4FY21. EBITDA/te may grow 7-8% YoY and remain broadly flat QoQ. Freight cost/te rise may be restricted to Rs40- 50/te QoQ with increasing share of rail mix and lower lead distance. Power and fuel costs/te increase may be curtailed up to Rs50-60/te QoQ with lower cost fuel inventory, change in fuel mix, increased blending and better fuel efficiencies. Overall, variable cost increase plus likely lower realisation QoQ till date would broadly be offset by lower maintenance cost of Rs40-50/te and better operating leverage of ~Rs100/te.

* Companies posted better than expected earnings both in Q2FY21 (+40% YoY EBITDA) and Q3FY21 (+45% YoY EBITDA) mainly led by better than expected realisation and lower than anticipated cost escalations. We see similar possibility in Q4FY21 as well and expect consensus earnings upgrade to continue.

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