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* Our coverage companies are expected to see a sharp 52% QoQ increase in EBITDA (albeit flat YoY) in Q3FY23, led by price improvement, benefit of input cost reduction as well as pick up in volumes due to the onset of a busy construction season. As a result, average EBITDA/ton is expected to increase by 40% QoQ (i.e. Rs239/ton); but decline by 11% YoY (Rs100/ton) to Rs834, although the quantum is divergent across companies, based on the Q2 base and regional exposure.

* Profitability has already bottomed in Q2FY23. We expect the Q3 margin recovery to further accelerate in Q4, owing to a major benefit from the inventory lag due to the recent weakness in input prices, and better operating leverage. However, margin recovery is already built-in the Street estimates and we see only a marginal scope of an earnings upgrade.

* Our medium-term upcycle thesis remains largely intact, albeit with a more gradual reset in profitability (RoIC), underpinned by improving demand-supply dynamics, better price discipline, cost optimization, and de-risking efforts. Key downside risks: 1) Lower-than-expected demand growth; 2) Any negative outcome from the CCI investigations.

* We continue to favor UltraTech and Shree Cement among large-caps.

* Q3FY23 volumes are likely to increase 11% YoY/8% QoQ, implying a 6% volume CAGR on 3-year basis. Demand was impacted in Oct-22 owing to the festive season. But it picked up pace from Nov-22, also benefiting from a low base. Q3FY23 volume growth is expected to come in at 15-23% YoY for Shree Cement, Ramco, JK Cement and Birla Corp; 9-13% for UltraTech, Dalmia, and Star Cement; 3% for Ambuja; and stay mostly flat for ACC.

* We expect average realizations to rise by 5% YoY/ ~2% QoQ in Q3FY23. Prices QoQ have improved by 5-7% in the South and East, while staying broadly flat in other regions. Cement companies have attempted a price hike of Rs10-20/bag across regions in Jan-23. The extent of absorption of the price hike will emerge over the next few days.

* Industry profitability to see upward trajectory from Q3FY23, owing to price improvement, benefit of input cost decline and better operating leverage. Accordingly, average EBITDA/ton is likely to increase 40% QoQ to Rs834 (although decline 11% YoY) in Q3. We estimate East-focused companies (like Dalmia) to witness sharper margin recovery on a sequential basis owing to stronger prices. Besides, both ACC and Ambuja will also witness a sharp recovery in QoQ profitability, owing to a low base.

* We estimate margin recovery to further accelerate in Q4FY23, owing to a major benefit of the inventory lag from the recent weakness in input prices, and better operating leverage. International petcoke prices are down ~40% from the peak to US$170/ton. With 10-15% correction in crude prices recently, an increase in diesel prices has also been ruled out for the near term

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