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Strong demand recovery; prices would improve

Industry volumes up over 20% MoM in Dec’21​

* Cement demand has started picking up from the second half of Dec’21 after the volume decline in Nov’21. We estimate that sales volume in Dec’21 should be up over 20% MoM (0-3% YoY). There should be a YoY improvement in demand in Dec’21 across regions (excluding East India).

* We expect industry volumes to decline by 5-7% YoY in 3QFY22 due to lower demand in Nov’21. We believe that the volume decline in Nov’21 was led by:

1) unseasonal rainfalls,

2) sand crisis in East India and a few pockets of Uttar Pradesh, which was resolved from the first week of Dec’21, and

3) an auspicious marriage season after the COVID-19 outbreak last year.

* Demand should improve further from Jan’22, with a pickup in government Infrastructure activities. Historically, Cement demand in January has been 4% higher (average of FY05-21) than December.

* On a high base of 4QFY21, we expect industry volumes to decline by 3-5% YoY in 4QFY22. Growth in industry volumes in FY22E should be at 8.6% YoY.

Prices decline across regions; East and South India see a higher erosion

* Cement prices have been under pressure in Nov-Dec’21, led by:

1) a steep volume decline in Nov’21 (this led to a rollback of most of the price hikes taken in Oct’21, and

2) volume push at the year-end by a few key players.

* Pan-India average Cement prices fell 6.5% MoM in Dec’21. In North and Central India, prices have declined by INR10/bag, West by INR5-10/bag, and East and South by INR20-25/bag in Dec’21.

* During 3QFY22, the pan-India average Cement price should be up by ~2% QoQ (up 4% YoY), led by a 2-5% QoQ price improvement across regions, except East India, where the average price is estimated to decline by ~2% QoQ.

* The industry will be in a better position to implement price hikes from Jan’22 onwards as we expect a further uptick in demand going forward.

Coal/petcoke prices decline from higher levels

*  There has been a decline in petcoke/imported coal prices in the last two months from peak levels. This should alleviate concerns of a steep increase in operating costs in 4QFY22.

*  South African coal prices have fallen to USD130-140/t from its peak of USD220- 230/t. Petcoke prices fell to USD140-150/t from its peak of USD220/t. Current spot petcoke prices are near their 2QFY22 consumption levels.

*  The average fuel cost for the industry should increase by INR250-300/t in 2HFY22 (INR100-150/t in 3QFY22). We expect the industry to witness peak fuel costs in 4QFY22 and there should be a gradual reduction post that.

Average spreads in Dec’21 are estimated to be the lowest since Mar’19

* Average EBITDA/t for our coverage universe was the highest ever in 1QFY22, led by better performance by bigger players (highest ever EBITDA/t for ACC, ACEM, and UTCEM).

* In 2QFY22, higher variable costs (led by an increase in petcoke/coal prices) impacted profitability for the industry, leading to an 11% YoY and 17% QoQ decline in EBITDA/t for our coverage companies.

* Based on coal/petcoke price trends, average spreads (Cement price net of taxes, RM cost, energy cost, and freight cost) for companies under our coverage in 3QFY22 are 7%/2% lower than its 3QFY21/2QFY22 average. After the recent price decline, spread in Dec’21 seems to be the lowest since Mar’19.

Cement prices a key monitorable; maintain our positive view on the sector

* We expect demand to improve going forward, led by government Infrastructure activity and a pick-up in demand from the Real Estate sector. Cement prices have declined in Nov-Dec’21 (Dec’21 exit pan-India average Cement price seems to be 3% lower than its 3Q average), which is expected to improve in 4QFY22.

* We expect Cement demand to outpace clinker capacity additions over FY21-24E, which should lead to an improvement in clinker utilization and profitability for the industry. We expect clinker utilization, excluding South India, to be more than 90% over Jan-Mar’22. This will boost the pricing power of manufacturers.

* UTCEM is our top pick followed by ACC and DALBHARA in the largecap space. We prefer TRCL and BCORP in the midcap space.

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