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Robust demand; all eyes on price hikes

* Our channel checks suggest that the industry likely recorded MoM growth (despite three days less) and high single-digit volume growth on a YoY basis in Feb’21, with very low clinker and cement inventory levels in the system. Aided by a low base of Mar’20, we believe that the industry is likely to report over 20% YoY volume growth in Q4FY21E and broadly flat volumes YoY in FY21E.

* Average pan-India prices likely rose 1% MoM (up 3% YoY) in Feb’21 with a 1-2% price increase across most regions, except South where prices likely declined 1% MoM. With strong underlying demand, low inventory levels and cost escalations, there is a high conviction for cement price increases across regions. We stay optimistic on cement price recovery.

* Prices of petcoke and diesel have increased 45% and 10%, respectively, in the last six months, which will start reflecting in cost/ton in Q4FY21E. In the past, companies have been able to pass on such cost increases and sustain/improve profitability.

* Industry volumes likely grew in high single digit YoY in Feb’21, with pan-India utilization at over 85%. The North region likely recorded mid-teens volume growth, while East continued to post double-digit volume growth. The Central region continued to witness mid-single digit YoY growth, while West turned positive with mid-single digit volume growth after registering broadly flat volumes in Jan’21. South was the only region to see a mid-single digit YoY decline in Jan-Feb’21. In our view, the low base of Mar’20 will help the industry register over 20% YoY volume growth in Q4FY21E, while FY21E volumes likely to be broadly flat YoY.

* Budget FY22 lays increased thrust on higher government capex on infrastructure (roads, railways and metro), which could boost demand, if executed well. Coupled with strong rural housing demand and improving urban housing in Tier 2/3 cities, the industry may see healthy demand over the next few years.

* Average pan-India prices likely rose 1% MoM/ 3% YoY in Feb’21.

Prices have increased by 1-2% MoM across regions, except South where prices have declined 1% MoM. On a YoY basis, prices likely rose 12% and 4% in the South and West regions, respectively; while they were broadly flat YoY in the North and Central regions. Prices were down 4% in the East regions. So far in Q4FY21, average pan-India prices have likely declined 2% QoQ, with a 3-4% decline in North and South and a 1-2% fall in East, West and Central regions. With strong underlying demand, low inventory levels and cost escalation, we remain optimistic on cement price recovery over the next few months.

* Increase in input cost to start reflecting from Q4FY21E but likely to be passed on: The industry is likely to witness the impact of various input cost escalations from Q4FY21E compared to the overall cost/ton decline of 3-4% YoY in 9MFY21. Prices of petcoke and diesel have increased by 45% and 10%, respectively, in the past six months, which will be partly offset by better operating leverage. Besides, in the past, the companies were able to pass on such cost escalations and sustain/improve profitability.

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