IGI Logo

Temporary weakness in demand; prices should improve further in 4QFY22

Demand under pressure in Nov’21, but expect an improvement going forward

* Cement demand has not yet picked up after the festive season, and sales volume in Nov’21 seems to be 18-20% lower than Oct’21 levels and against its historical average of a 6% MoM decline in November.

* Few stockists/marketing personnel attribute the decline in demand to unseasonal rainfall in many parts of the country, continued sand crisis in the East region and Eastern Uttar Pradesh, auspicious marriage season after the COVID-19 outbreak last year, better volumes in Oct’21 on expectations of price hikes, and sudden price hikes.

* With the onset of the busy construction period (December-March), we expect demand to recover going forward. Historically, Cement demand in December has been 12% higher (average of FY05-21) than November.

* Based on current demand trends, we expect industry volumes to decline by 4- 7% YoY in 3QFY22. Core industries data for FY21 did not reflect the true picture of industry demand trends (our analysed companies, which represents over 60% of industry’s capacities, reported a volume growth of 2% YoY in FY21, whereas the core industries data reflected an industry volume decline of 12% YoY).

Partial rollback of price hikes in most parts of the country

* In North India, companies rolled back INR10-15/bag of price hikes of the INR35/bag announced in Oct’21. Few stockists are indicating that there could be a further rollback of price hikes, if demand remains weak. In East India too, weak demand led to a partial rollback of price hikes (INR5-10/bag).

* In South and West India, there has been a rollback of INR10-20/bag of the announced price hikes of INR20-50/bag. Cement prices are up an average 5.9% across India from its 2QFY22 average. On a YoY basis, average prices are ~7.7% higher.

* The industry will be in a better position to implement price hikes, with an expected recovery in demand going forward.

Coal/petcoke prices decline from higher levels, but still up over 100% YoY

* There has been a decline in petcoke/imported coal prices in the last one month from peak levels. South African coal prices have fallen to USD150-160/t from its peak of USD220-230/t. Petcoke prices fell to USD170-180/t from its peak of USD220/t. Even after the recent decline, petcoke/coal prices are up over 100% YoY (petcoke prices are up 50% from average consumption levels in 2QFY22).

* Current coal/petcoke prices may lead to a cost escalation of INR350-400/t (though cost pressures in 4QFY22E are expected to be higher as a few companies may have imitated contracts at higher fuel prices).

* If current Cement prices sustain, it should help absorb most of the cost increases (though EBITDA/t in 4Q is expected to be lower than that in 1QFY22). We need to track the movement in Cement as well as fuel prices (which has been volatile in the last 3-4 months) closely for the next few months.

Average spread (Cement price less variable costs) in 3QFY22 seems to be lower than 3QFY21, but marginally better than 2QFY22

* 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 a decline of 11% YoY and 17% QoQ in EBITDA/t for our coverage companies.

* Based on coal/petcoke price trends, average spread (Cement price net of taxes, RM cost, energy cost, and freight cost) for companies under our coverage in 3QFY22 is 5% lower than its 3QFY21 average, but marginally better than its 2QFY22 average (up 2%). After the recent price decline, spread in Nov’21 seems to be the lowest in CY21.

Remain constructive on the sector, Cement prices/fuel costs a key monitorable

* We maintain our positive view on the sector as we expect an improvement in the demand scenario, led by government Infrastructure activity and a pick-up in demand from the Real Estate sector.

* Though higher petcoke/coal prices have recently impacted profitability of the industry, we expect petcoke/coal prices to soften in CY22E, which should lead to an improvement in profitability for the industry.

* The price increase of 5%/4% QoQ in 3Q/4QFY22E will help companies under our coverage universe to meet our FY22E EBITDA estimates.

* We estimate Cement demand to outpace clinker capacity additions over FY21- 24E, and expect an improvement in clinker utilization and profitability for the industry over this period.

* UTCEM is our top pick followed by ACC and DALBHARA in the large-cap space. We prefer TRCL and BCORP in the mid-cap space.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer