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3QFY21 Results Preview

* Utilisation firms up to 80% in 3QFY21E:

Cement demand continued to recover during 3QFY21, firming up utilisation to 80% vs 78% YoY. During the quarter, we estimate aggregate sales volumes for 13 cement companies under coverage to accelerate to 9% YoY, (fastest in the past two years). This is led by volume growth across all markets barring south. While retail sales continued to be buoyant, even non-trade sales have picked up, boosting growth.

* Cement prices cool off QoQ partly, still strong YoY:

Cement prices remained flat QoQ in the north region in 3QFY21 while it cooled off 2% QoQ in the central region. Cement prices fell 3% each in the eastern, western and southern regions during the quarter. Thus, pan India average realisation fell ~2% QoQ. On a YoY basis, central region prices flattened, followed by 2% growth in the east. North and west prices remained 4% higher while south prices remained firm with 16% spike up. Pan India average prices firmed up 5% YoY, led by robust prices in south.

* Continued opex decline YoY to further bolster margin:

We expect unitary input cost to increase 4% QoQ, led by rising fuel price rebound, and rising fly ash and slag prices. However, on a YoY basis, we expect unitary input cost to continue to decline (down 3% YoY). Rising diesel prices should, however, drive up unitary freight cost by 3/4% QoQ/YoY. Lower packing cost and fixed cost controls should lead to unitary fixed cost decline by 4/7% QoQ/YoY respectively. Thus, unitary opex should fall 2% YoY, bolstering unitary EBITDA by 21% to Rs 1,110 (despite 15% QoQ cool off).

* Companies’ performance:

We estimate our coverage universe to deliver 9/11/30/60% YoY sales volume/revenue/EBITDA/APAT growth respectively in 3QFY21 on better demand and pricing and low cost. We expect Dalmia Bharat, JK Cement, Shree Cement and UltraTech to deliver both industry-leading unitary EBITDA and volume growth during 3Q.

* Sector outlook and stock views:

Cement demand continues to accelerate led by robust retail demand and rising non-trade sales. We continue to be bullish on regional pricing outlook for north and central regions owing to robust regional utilisation, high regional consolidation and low influx of new players. Hence we expect players in these regions be better placed to pass on the recent spike up in cost inflation. We have revised up earnings estimates for south based – Dalmia, Deccan and Orient factoring in robust pricing currently. We have rolled forward valuations on Dec’22E (vs Sep’22E earlier). Post the recent surge in stock prices, we downgrade ACC to ADD (from BUY earlier) and Shree Cement to REDUCE (from ADD earlier). Our top picks are UltraTech, Birla Corp, JK Cement and Dalmia Bharat.

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