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Demand in pre-election year FY24 has started on a strong note. Volume for our coverage universe is estimated to grow >15% YoY (in sync with industry). Yet, coverage EBITDA is expected to stay flat YoY owing to – a) muted cement prices (down 4-5% YoY, flattish QoQ) and b) marginal QoQ drop in fuel cost due to inventory-lag impact (major benefits expected in Q2/Q3 FY24E).

Robust demand trend may drive volume assumptions higher and fuel cost too is set to ease further (at least until Q3FY24E, based on current spot fuel rates). However, it is too early to project earnings upgrade given the expected weak cement price season of Q2/Q3FY24. Historically, both robust demand as well as plunging fuel cost have triggered competitive intensity. Given the display of weak pricing power since past couple of quarters and heightened underlying competitive intensity (ever since Adani Cement’s foray with aggressive expansion plans), we see no reason for a different outcome this time as well. We see limited risk to our EBITDA estimates (~7% below consensus) and stay Cautious on cement sector.

Key risks: Firm cement prices in Q2/Q3 of FY24

* Volumes on a high, yet realisation stays muted: With industry leader UltraTech Cement reporting 20% volume growth, cement demand is clearly buzzing. We estimate volumes for our coverage universe to surge >15% YoY – broadly in sync with the industry. Interestingly, the QoQ drop in volumes seems arrested at <4% vs a usual drop of 8-10% for Q1 (vs Q4 of any fiscal). However, we estimate realisation to drop marginally by 0.5% QoQ (down 4-5% YoY) owing to high competitive intensity pan-India.

* EBITDA growth in slow lane: Due to inventory-lag impact, most companies have guided for benefits of low spot fuel prices to accrue by Q2/Q3 FY24. Accordingly, we have penciled in a QoQ fuel cost drop of Rs80-100/t vs Q4FY23 even as spot rates suggest a potential drop of Rs300-350/t. Accordingly, EBITDA for our coverage universe is estimated to be flat YoY (down 6% QoQ). EBITDA/t too is estimated to be flat QoQ or dip marginally.

* Earnings course correction? Caution advised: Volume growth is heartening and easing fuel cost lends excitement, too. Yet, we advise caution against earnings upgrades just yet given cement prices have to weather the weak patch of Q2/Q3 FY24. Historically, both the potent positives – of high demand in pre-election year

Key risks

Material reduction in competitive intensity is the key upside risk to our hypothesis. Sharp cement price hike or sharp decline in fuel cost may force an earnings upgrade.

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