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Strong volumes to benefit in 4Q; Price hikes are still awaited 

Cement demand picked up sharply in Dec’21 following a significant slowdown in Nov’21 and continued in Jan’22. However, demand witnessed modeation in in Feb’22, owing to unavailability of labour and elections in five major states, disrupting the construction activity in these regions, which was reversed quickly with strong uptick in Mar’22. We are factoring in a sequential volume change of +4% to +48% QoQ for 4QFY22 factoring in the commissioning of the capacities and exposure to different geographies (-3% to +6% YoY). Owing to high base of last year, overall volumes are expected to report a marginal growth of 1% YoY. Average cement prices remained largely stable, however, regionwise East (+14% QoQ) witnessed a sharp uptick in Jan’22 which were partially rolled-back subsequently in Feb-Mar’22. Other regions have witnessed a stable to marginally negative trend. Average cement prices are expected to report 1% QoQ rise. On the cost front, we are expecting a softening of INR 50-60/t as the marginal rise in manufacturing costs are expected to be more than offset by operating leverage benefits (+18% cumulative volume growth). Limited impact on manufacturing costs in 4Q was primarily owing to relatively low cost inventory. Sharp petcoke/coal price spike in 4Q will impact margins in 1QFY23. Cumulative EBITDA is expected to report c.28% QoQ improvement (-21% YoY), largely led by demand improvement. Average EBITDA/t to witness an uptick of 9% QoQ to INR 946/t (- 23% YoY), varying -3% to +38% QoQ for the 11 companies under coverage. Rise in variable costs will be more than offset by marginal rise in realisations and operating leverage benefits. However, desired price hikes to offset the cost escalations still eludes the industry. We expect Shree Cement, Orient Cement and JK Cement are expected to outperform peers. Muted pricing trend despite rising costs will drive the downgrade in estimates post results.

Demand picked up in Dec’21 continued in 4Q with moderate softening in Feb’22:

Cement demand witnessed a sharp recovery in 2H of Dec’21 following a sharp slowdown in Nov’21 and continued in 4Q with mild moderation in Feb’22. As per the rail freight data, cement volumes transported witnessed a sequential rise of 24% in 4Q. Channel checks suggest the demand moderation in Feb’22 was owing to temporary reasons – unavailability of labour and elections in five major states. We are factoring in +4% to +48% QoQ change in the cement volumes across coverage companies (-3% to +6% YoY) factoring in the capacity additions and regional exposure.

East witnesses sharp price hikes, while other regions to report flat to marginally negative trend QoQ; factoring in realisation change of -2% to +6% QoQ

Sharp rise in the cement price in Jan’22, primarily in East drove the average prices up by +14% on a QoQ basis despite the successive decline over the course of the quarter. Other regions largely witnessed a stable pricing trend despite the escalating costs. For the coverage companies, we are factoring in a realisation change in the range of -2% to +6% QoQ based on the regional exposure.

Wtd average EBITDA/t to witness a 9% rise as the benefit of realisations and operating leverage outweigh the rise in manufacturing costs:

We expect the impact of sharp increase in pet-coke and coal prices to be visible in the costs in 1Q. However, 4Q too is expected to witness an increase as the consumption costs in 3Q were still lower than spot prices. However, stable diesel prices will help the freight costs to remain stable QoQ. The rise in the variable costs is expected to be more than offset by operating leverage benefits (+18% volume growth QoQ) and cement price improvements (+1% QoQ). We are factoring in -3% to +38% QoQ change in EBITDA/t for the coverage companies (+9% QoQ rise in weighted average EBITDA/t).

Shree Cement, Orient Cement and JK Cement to outperform:

We expect Shree Cement, Orient Cement and JK Cement are expected to outperform peers in profitability. Muted pricing trend despite rising costs will drive the downgrade in estimates post results. Commentary on cement prices and demand will be key.

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