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Volume recovery continues, margins stay strong

Lower fixed costs should offset the impact of rising variable cost

* We estimate our coverage universe to report a 11%/ 42%/ 80% YoY growth in Revenue/ EBITDA/ PAT due to higher cement prices and strong volumes (+7% YoY, +15% QoQ). While realization is expected to grow 4.5% YoY (-1% QoQ) to INR4,974/t, EBITDA per ton is estimated to rise 33% YoY to INR1,225/t (-1% QoQ) supported by 2% YoY fall in cost to INR3,750/t.

* Cement industry volumes have continued to recover, led by rural housing and a pickup in government spending (particularly in East and North).

* Pan India average cement price has been up 7% YoY (flat QoQ) in 3QFY21, despite softening prices across regions in Dec’20.

Volumes stay strong - up 7% YoY led by North, East and Central

* Volume recovery after the lifting of COVID-19 led restrictions has sustained even in 3QFY21, which is positive for the sector.

* While demand was strong in Oct, it tapered off in Nov due to festive holidays (Diwali, Chhath) and workers returning to their villages for the same. The same however improved again in Dec.

* As per our channel checks, volumes are growing >10% YoY in the North, East, and Central India. While demand has remained weak in South and Maharashtra, it has recovered strongly from the 15–20% YoY decline seen in 2QFY21.

* Demand in East has been particularly strong, supported by pre-election spending by the state governments in West Bengal and Assam. Odisha, on the other hand, has seen an uptick in industrial infra demand.

* In 3QFY21, we estimate volumes for our Coverage Universe to have grown 7% YoY (15% QoQ), with higher growth for North and East based companies.

* JK Cement, particularly, is expected to report very strong volume growth (+23% YoY), supported by capacity expansion. We further expect volumes to grow 14%/ 9%/ 9%/ 8%/ 6%/ 4%/ 1% for Shree/ UltraTech/ Dalmia/ JK Lakshmi/ Ambuja/ Birla Corp/ ACC. On the other hand, we expect decline of 10% YoY for India Cements and 5% YoY for Ramco due to their high exposure to South.

Prices up in North/Central, but declines in the East

* Pan India average cement price has been up 7% YoY in 3QFY21, led by a 17% increase in South and 6-7% in North, Central, and West, even as East was flat.

* Pan India average price, however, has been flat QoQ on 3% MoM decline in December across regions. On a QoQ basis, price was +3%/+2%/0%/-1%/-5% in North/Central/West/ South/East in 3QFY21.

* East posted sharp decline – 6%/7%/8%/5% QoQ decline was seen in Bihar/Jharkhand/Odisha/West Bengal due to new capacities and higher interregional flow of material from South.

* Prices in North were up 3% QoQ in 3QFY21 led by a 4%/4%/2% QoQ rise in Punjab/Haryana/Rajasthan. Prices in the Central region were up 2% QoQ (up 6% YoY). Prices in the West were flat QoQ on account of the 1% QoQ decline in Gujarat, while it was up 1% QoQ in Mumbai. We expect average realization for our coverage universe to be up 4.5% YoY at INR4,974 (-1% QoQ).

Cost to decline by 2% YoY on lower fixed costs and operating leverage

* We expect average cost per tonne for our coverage universe to decline by 2% YoY (+1% QoQ) to INR3,750 due to lower fixed costs and operating leverage gains from higher volumes. This should offset the impact of an increase in cost of power and fuel (+3% YoY, +8% QoQ) and freight (+2% YoY, +1% QoQ).

* We expect EBITDA/t to increase 33% YoY (-6% QoQ) to INR1,225 for our coverage universe.

Top picks – UltraTech, ACC and Dalmia Bharat

* While we are structurally positive on the industry outlook, we prefer North and Central as these markets have a higher clinker utilization of over 80%.

* We adopt a bottom-up stock-picking approach and prefer companies that: a) are moving down the cost curve, b) have the potential to gain market share, and c) provide valuation comfort.

* UltraTech is our top large-cap pick, while Dalmia Bharat is the top mid-cap pick. We also like ACC as a value pick, but do not see much upside in Shree, Ramco, and Ambuja, whose potential market share gains are already priced in.

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