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Demand improves; prices to follow

Our channel checks suggest likely sharp ~35% MoM demand rise (on low base) in Dec’21 which may imply low-single-digit YoY growth vs mid-single-digit YoY decline in Oct-Nov’21. Receding festive holidays / wedding season / monsoon, better availability of sand / labour, lower MoM prices of construction materials like steel, cement and sand, pick-up in infrastructure projects, improved release of funds and pent-up demand likely led to a sharp MoM uptick in volumes. However, average pan-India prices fell sharply by 5% MoM (still up 5% YoY) owing to volume push. Demand recovery in Dec’21 may alleviate recent investor concerns around any slowdown. We believe consensus earnings downgrade, if any, seems priced in and risk-reward is favourable as highlighted in our recent note Outlook CY22: In uncertainty lies opportunity. UTCEM, ACEM and SRCM remain our top picks. We also like JKCE and TRCL. Key risk: Lower demand / prices

* Industry volumes are likely to rise low-single-digit YoY / ~35% MoM to ~33mnte in Dec’21, implying pan India utilisation of ~78%. On an MoM basis, all regions are likely to see sharp 30-50% MoM volume growth (on low base) led by South and East regions. On a YoY basis, South may see low-double-digit volume growth (on low base), East may still see marginal fall, while all other regions may see low-single-digit growth. Historically, Dec demand has been important as it sets the momentum for the peak construction period of Jan-Jun.

* Average pan-India prices declined sharply 5% MoM (still up 5% YoY) in Dec’21 owing to volume push. Average prices fell sharply in East and South by ~7% MoM and exit prices in these regions are below Sep’21 levels; while other regions also saw 3-4% MoM fall. However, average prices in Dec’21 are still up 6-7% YoY in North / Central regions, up 11% YoY in West, up 3% YoY in East and almost flat YoY in South. With improving demand, dealers suggest prices may rise from midJan’22 across most regions as per usual seasonality.

* Higher YoY prices to offset cost pressures and lower volumes during Q3FY22: Diesel prices dipped 7% MoM, while imported coal prices have corrected sharply by >40% MoM to 25% MoM to US$185/te and Rs15,680/te, respectively, in Dec’21. The benefits of lower costs are likely to reflect Q4FY22 onward and costs are still likely to rise sharply both QoQ and YoY during Q3FY22. Average Q3FY22 EBITDA/te may still remain broadly flat both QoQ and YoY as the impact of lower volumes and higher costs is likely to get offset by higher prices (~3% QoQ and 7% YoY).

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