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Price hikes and easing cost pressure to aid improvement

Cement price improves in Oct-Nov’22

* Pan-India average cement price increased by ~2% MoM in Oct’22 led by 2-5% price increase in South, East and West markets. Cement manufacturers have announced further price hikes of INR15-20/bag across regions in Nov’22. Absorption of these price hikes by consumers needs to be monitored.

* We believe that the decline in coal/petcoke prices should help average cost reduction of at least INR150/t in 3QFY23. Imported coal price after remaining at an elevated level of USD250-350/t (Richard Bay Spot prices) over Mar’22-Oct’22 has declined by 19% in the last one month. Though, Petcoke prices have increased from mid-Oct’22, it remains 29% lower than 1QFY23 average price.

* Cement demand was subdued in Oct’22 due to early festive season and is estimated to decline ~7-8% YoY and ~3-4% MoM. However, we expect the demand to revive in the coming months with improvement in labor availability and rural demand, govt’s thrust on infrastructure (aided by pre-election govt. spending) and steady demand from the housing segment.

* Average spreads (cement price net of GST- variable costs) should improve ~INR300/t for the industry in 3QFY23E; benefitting from reduction in power and fuel cost and improvement in realization. Profitability in 2QFY23 seemed to have bottomed out with EBITDA/t for our coverage universe at INR567 v/s INR1,151 YoY/INR975 QoQ.

Oct’22 demand down 3-4% YoY/7-8% MoM; but up 5% on a 3-yr CAGR basis

* We believe cement demand was down 3-4% YoY/7-8% MoM in Oct’22. On a threeyear CAGR basis, demand should be up by 5% in Oct’22/~10% YTD (Apr-Oct).

* In Oct’22, cement demand was subdued due to early festive season (Durga Puja, Diwali, Chhath Puja, etc.) and extended rainfalls in some parts of the country i.e. Maharashtra and Karnataka.

* Cement demand should improve going forward with improvement in labor availability, rise in rural demand, govt. thrust on infrastructure (aided by preelection government spending) and steady demand from housing segment. We estimate cement demand to grow at ~10%/9% YoY in FY23/24; demand is estimated to grow at ~6-7% in 2HFY23.

Prices improve in South/East/West; remain flat in North/Central in Oct’22

* Cement prices increased INR5-20/bag MoM (2-5%) in South/East/West India, while remained flat in North and Central India in Oct’22. All India average cement price increased ~2% MoM in Oct’22.

* The highest increase was seen in South India (~5% MoM) followed by West (3% MoM) and East (2% MoM) in Oct’22. Cement price has improved across key markets of South India in the range of INR10-35/bag with the highest increase seen in Kerala, followed by Karnataka, Tamil Nadu and Andhra Pradesh.

* South India had seen higher decline in prices in 1HFY23. Average cement price in 1HFY23 as compared to Mar’22-exit declined ~5% in South India v/s 1-4% higher in other regions.

* In the first week of Nov’22, cement players announced price hikes of INR5- 10/bag across regions. As per our channel checks, cement players are planning to implement another price hike of INR10/bag across regions.

Imported coal price declines sharply, petcoke price increases

* Imported coal price after remaining at an elevated level of USD250-350/t (Richard Bay Spot prices) over Mar’22-Oct’22 has declined by 19% to USD195/t in the last one month.

* Domestic petcoke price increased 5% MTD to INR18,949/t in Nov’22. While the US and Saudi Arabia’s petcoke prices increased 3-5% MTD to USD195/t (each). Current Petcoke price is 29% lower than 1QFY23 average price. Diesel prices (Mumbai retail price) have remained unchanged from Jul’22.

Profitability should improve in 2HFY23; remain positive on the sector

* Based on variable costs and cement price movements over the past few months, we estimate the average spread in 3QFY23 for trade sales (cement price net of GST- variable costs) to be ~INR300/t higher than 2QFY23 average. We do not foresee any risk of earnings downgrades in the current scenario.

* We are positive on the cement industry dynamics for the next few years due to 1) better demand prospects led by infrastructure and housing sector, 2) increased consolidation in the industry and 3) regulatory changes in the allotment of limestone blocks. Our demand CAGR estimate of ~8% over the next three years is likely to surpass installed capacity CAGR of 5.5%. We prefer regions with favorable demand-supply situation and better pricing power such as North, Gujarat and Central markets.

* UTCEM is our top pick in the largecap space. We prefer DALBHARA and JKCE in the midcap space.

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