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Overview

In Q3 FY23 we expect sales to have grown for all the cement companies we cover, backed by firm volume and realization growths. While volume growth is backed by healthy infra and real estate demand; realizations would have improved due to price hikes on pass-through of costs. The operating performance, however, is expected to have been under pressure despite softness in international fuel prices as companies might have high-cost stocks in Q3 FY23. Yet, with the better volume outlook, a likely fall in costs, better cost management, continued pass-through of costs and risingconsolidation, the sector outlook likely toturn around by early 2023

Slower pace of non-residential building construction slowed cement demand the most

Deceleration of non-residential building construction is the key dampener of cement demand. With lower cement intensity of infra vs. buildings, cement intensity of construction fell considerably after 2016 as, until recently, infra was the fastest growing part of construction. Revival of residential since 2021 boosted cement demand while demand from non-residential contracted sharply and that of infra decelerated

Q/Q volume rise, continued passthrough of cost; strong sales growth in Q3 FY23

11% y/y volume growth and pass-through of cost pressures likely to result in rise in sales. Strong demand drivers being infra and real estate. Having contracted sharply q/q in Q2 FY23, revenue is expected to improve firmly in Q3 FY23 to fourquarter-high TTM sales growth. Company-wise volume data suggest that south based companies may have better volume growth than other regions

Expect 12.4% y/y jump and 1.6% q/q contraction in per-tonne cost in Q3 FY23

At the industry level, we expect cost per tonne to rise 16.5% on TTM, 12.4% y/y. Whereas the cooling off of fuel prices would lead cost per tonne to decline 1.6% q/q in Q3 FY23. With coal, pet coke and other fuel costs declining, we expect a 4.8% q/q fall in fuel and power costs at the industry level during Q3 FY23. However, we expect the total benefit of the dip in fuel prices to be visible in Q4 FY23 as companies might have high-cost stocks in Q3 FY23

While EBITDA/tonne declined steeply in Q2 FY23, a healthy q/q improvement is expected in Q3 FY23 backed by improving cost environment

We expect the companies we cover to record a 4.5% y/y contraction and a 55.7% q/q jump in EBIDTA during Q3 FY23. They would clock a 27-92% drop in EBIDTA from the record high despite healthy volume and realisation growths. We expect PAT to continue to report negative TTM growth; however, acceleration is expected in y/y growth in Q3 FY23. Large caps seem to be focusing more on cost management than volumes, yielding better EBIDTA/tonne

The pressure on margins to continue in Q3 FY23

After reporting lowest EBITDA and PAT margins in last 16 quarters in Q2 FY23, modest q/q improvement is expected in Q3 FY23 on improving cost environment. However y/y EBIDTA margins continue to remain under pressure. PAT margin compressions for all companies likely to continue in Q3 FY23 vs. the peak.

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