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Price hikes on the cards, volumes should support

Sales volumes improve in most markets in Mar’22

Our interactions with dealers indicate that Cement demand improved in most markets in Mar’22 after remaining sluggish in Jan-Feb’22. We believe that panIndia Cement volumes were 3-5% YoY higher in Mar’22 after a decline of ~6% YoY during Jan-Feb ‘22

Few dealers believe that the expectations of Cement price hikes in Apr’22 led to a strong increase in dispatches at the end of Mar’22 and actual demand trends will be known by mid-Apr’22. However, most dealers believe that secondary sales too were strong in Mar’22.

We expect industry volumes to fall by 2% YoY in 4QFY22. For FY22, we expect volume growth for the industry to be 8.7% YoY (volume growth for our coverage universe should be 8% YoY).

Prices rise across regions in Mar’22, expect a further price hike

Cement prices rose 2-3% MoM across regions in Mar’22, despite some volume push, to meet the year-end targets. We believe that exit Cement prices in 4QFY22 were 3% higher than the average realization for the quarter.

Our interaction with dealers suggests that non-trade Cement prices in Mar’22 rose by INR15-20/bag in South and Central, whereas the price increase was INR5-10/bag in North, East, and West India

Cement companies are planning further price hikes to mitigate the impact of rising RM costs. The impact of the rise in coal and petcoke prices will reflect in energy costs from Apr’22. There has been an increase in diesel prices in the last few days, which will lead to higher freight costs. Companies have indicated a cumulative price increase of INR40-50/bag across regions in Apr’22. Our interactions with dealers indicate a price hike of INR15-20/bag will be announced in the first week of Apr’22.

Imported coal and petcoke prices remain higher v/s consumption cost in 3QFY22

In our previous report, we had raised concerns over the upward trend in coal and petcoke prices and its impact on operating costs. Though imported South African and Australian coal prices have corrected from their peak of Mar’22, current prices remain at much higher levels v/s consumption cost for the industry in 3QFY22

Few companies had indicated in their 3Q result concall that their average consumption cost in 3QFY22 was in the USD150-160/t range. Current South African and Australian coal prices stand at USD255-260/t (peak price of over USD400/t in Mar’22), whereas imported petcoke price is at USD260/t.

Domestic petcoke prices rose 21% MoM to INR21,816/t (5% above its peak of INR20,781/t in Nov’21). Our calculation suggests that consumption cost of domestic petcoke will be at par with imports after the recent price increase.

At current coal/petcoke prices; petcoke still remains cheaper than imported coal (as per our calculations; consumption of petcoke is 19% cheaper compared to imported coal from Australia/South Africa).

As per our calculations, sustenance of current coal/petcoke prices may result in a INR500/t cost increase for the industry (impact of over INR350/t in 1QFY23E). This cost escalation will accrue after an average variable cost increase of ~INR500/t in FY22

Apart from coal/petcoke prices, diesel prices are up ~9% in the last few days. This will have an impact of ~INR40/t on freight costs for the industry as a whole

Spreads in 4Q better than 3Q; hike of INR30/bag will help sustain spreads in 1QFY23E

Based on coal, petcoke, and Cement prices over the last few months, we believe average spreads (Cement price net of taxes, RM cost, energy cost, and freight cost) for the industry improved significantly in Mar’22 (spreads in Dec’21 were the lowest in FY22, led by a steep decline in Cement prices).

The hike of INR30/bag in Apr-May‘22 will help the industry to achieve 4QFY22E profitability in 1QFY23E, if current coal prices sustain (an average spread of INR1,900/t in May’22E v/s INR1,940/t in 4QFY22E).

Valuation and view

Despite near-term headwinds on earnings, we maintain our positive view on the sector as we expect Cement demand to improve, led by the government push on Infrastructure development, low-cost Housing schemes of the government, and improvement in Real Estate demand.

Cement demand is expected to be better than clinker capacity additions over FY22-24. This should aid improvement in clinker utilization for the industry

Cement stocks have corrected on concerns of RM cost inflation, which led to earnings downgrades. Any correction in fuel prices will help improve industry sentiment.

UTCEM is our top pick, followed by ACC in the largecap space. We prefer BCORP in the midcap space.

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