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For the cement industry, Q1FY24E was a busy quarter before the monsoon season. The demand remained strong aided by the infra & real estate segment, as a result we believe the industry to see a volume growth of 18% y/y in Q1FY24E. During AprJun’23, cement prices moderated q/q as players pushed higher dispatches to sustain sequential volume growth. All-India average cement price declined by 2% y/y and q/q both to Rs377/bag during Q1FY24E. Consequently, we believe industry’s NSR to moderate by 4% y/y and 2% q/q, although revenue is expected to grow by 13% y/y primarily driven by strong volume growth in Q1FY24E. Given the steady fall in energy cost (Imported Coal $114/te and Pet?coke $105/te in Jun’23), the 3-month trailing blended fuel cost corrected to Rs1.5 per kcal/kg vis-à-vis ~Rs2.33 per kcal/kg in Q4FY23. As a result, we expect industry power & fuel cost to decline further by Rs100-150/te in Q1FY24E v/s Q4FY23. Accordingly, industry EBITDA is expected to improve by another Rs100-150/te sequentially to +Rs1000/te, despite muted NSR in Q1FY24E. We reiterate our POSITIVE stance on the sector guided by robust demand and easing costs, which may surpass earnings expectations. Our top picks are UTCEM, DALBHARA, SGC & ORCMNT.

? Demand Outlook: We expect volumes of our coverage companies to increase by +18% y/y owing to newly added capacities and strong demand momentum led by the infra segment, while sequentially it is expected to stay flat to marginal decline in Q1FY24E. According to DPIIT, cement volume increased by +14% y/y during Apr-May’23 and our channel check indicated that the demand momentum continued in Jun’23. In Q1FY24E, demand was largely driven by the strong infra & construction activities. While the retail demand momentum continues to grow gradually. We believe companies like TRCL/SGC should deliver a volume growth of +40/30% y/y on account of low base and newly added capacities. While companies like ICEM/JKLC/ACC & ACEM should report high single-digit volume growth due to lower production headroom and higher cost affecting the operation.

? Pricing Outlook: We expect NSR of our coverage companies to decline by 4% y/y and 2% q/q in Q1FY24E. During Apr-Jun’23, All-India average cement price declined by 2% y/y and q/q both to Rs377/bag as players pushed higher dispatches to sustain sequential volume growth. All-India average trade price declined by Rs5-10/bag M/M given trade price drop in South/East by Rs15- 20/bag (rest stayed flat M/M). All-India avg non-trade price grew Rs2-5/bag given the uptick in North/West non-trade price (+Rs5/20 per bag) despite South & East price correction (Rs5-10/bag). Regionally, the players operating in south/west/east & north could witness NSR fall of 1-2% q/q, while the central region NSR could decline by 2-3% q/q in Q1FY24E.

? Cost Outlook: The fuel prices witnessed major correction as Pet coke fell to US$105/te in Jun’23 compared to $160 by Mar’23 exit v/s US$240/te in Jun’22. Similarly, the imported coal (South African NAR 6000) cooled off to US$114/te in Jun’22 compared to $147/te by Mar’23 exit v/s US$355/te in Jun’22. As a result, 3-month trailing blended fuel cost corrected to Rs1.5 per kcal/kg vis-à-vis~Rs2.33 per kcal/kg (indicated by the companies) in Q4FY23. Therefore, we expect the industry power & fuel cost to decline further by Rs100?150/te in Q1FY24E as compared to Q4FY23, which translates in industry EBITDA trajectory towards +Rs1,000/te, even after NSR moderation. The blended spot fuel cost (pet coke & imported coal) further corrected by 5% M/M in Jun’23 which translates to Rs1.32 per kcal/kg. As a result, this should reduce P&F cost further to the tune of Rs50- 100/te by Q2FY24E.

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