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Demand set to rise, yet pricing remains competitive in 2H

Industry volume up 3-5% YoY in Oct-Nov’24

* As per our channel checks, industry volume is estimated to have grown 3-5% YoY in Oct-Nov’24 (down 10-11% in Oct’24; up 20-22% YoY in Nov’24). Celebration of Durga Puja and Diwali in Oct’24 vs. Diwali in Nov’23 led to a higher decline in Oct’24, followed by strong growth in Nov’24. There are signs of recovery in cement demand after the festive seasons, and we estimate industry volume growth of ~8-9% YoY in 2HFY25, driven by pent-up demand, an expected rebound in government spending and robust demand in the real estate and housing sectors.

* Average cement price largely remained flat MoM in Nov’24. Prices have moved up ~1% in the North region and Madhya Pradesh, while they have declined ~1% in the South region. Prices remained flat in East, West, and Uttar Pradesh. The all-India average cement price in Oct-Nov’24 was up ~1% compared to 2QFY25 average. Cement dealers indicated that industry players increased billing prices in the range of INR10-30/bag across regions in Dec’24. Nevertheless, the sustainability needs to be watched out for given higher competitive intensity.

* We have analyzed the realization trends for the last 12 years (FY13-24) and observed that average realization (for our coverage companies) during 2H declined ~1% as compared to 1H. Most of the years, realization fell in the range of ~1-6%, with a few exceptions when realization remained flat in 2H compared to 1H. However, only in FY22, the realization was higher in 2H compared to 1H, mainly due to the pass-on of the spike in fuel prices during the Russia-Ukraine war. Given the historical trend, if competitive pricing were to continue in 2HFY25, this may pose a risk to our FY25 earnings estimates.

* Imported petcoke prices increased ~3-5% MoM in Nov’24, whereas imported coal prices (South African) remained range-bound. At the spot price, imported petcoke consumption costs stood at INR1.20/Kcal, while imported coal (South African) costs stood at INR1.65/kcal. Based on the prevailing fuel prices, we estimate cement spread to improve (due to lower fuel price) up to INR25-30/t in 2HFY25 over 1HFY25

Estimate volume growth of 8-9% YoY in 2H

* After a sluggish industry volume growth of ~1-2% YoY in 1HFY25, cement demand picked up to 3-5% YoY in Oct-Nov’24. Cement volume declined by 10-11% YoY in Oct’24, impacted by a high base of last year, festivals and unseasonal rains in a few parts of the country. A favorable base led to strong growth of 20-22% YoY in Nov’24.

* After a 12.7% YoY contraction in government capex in 1HFY25 (central government capex down 13.5% YoY and state government capex down 11.5% YoY). Govt capex is expected to pick up in 2HFY25. This should lead to improvement in cement demand, and we estimate volume growth of ~8-9% YoY in 2HFY25. We also expect FY26E to start on a strong note in terms of cement demand as Mar-Jun’25 is the strongest period for cement consumption.

Prices to follow demand improvement, though 2H numbers could be at risk

* Historically, in most of the years (over FY13-24), industry realization fell in the range of ~1-6%, with a few exceptions when realization remained flat in 2H compared to 1H. Industry players attempted price hikes during Oct-Nov’24; however, due to higher competitive intensity and modest cement demand growth, the large part of the price hike was rolled back. Resultantly, the all-India average cement price was up ~1% in Oct-Nov’24 vs. 2QFY25 average and was flat vs. 1HFY25 average. Given the historical trend, if competitive pricing were to continue in 2HFY25, this may pose a risk to FY25 earnings estimates.

* Secondly, imported petcoke prices, after witnessing a sharp correction in Sep-Oct’24 (down ~15% sequentially), have increased from mid-Nov’24. The spot price of imported petcoke is up ~7-9% MoM and domestic petcoke is up ~6%. Imported coal (South African) price has largely remained range-bound. Based on the prevailing fuel prices, we estimate cement spread to improve up to INR25-30/t in 2HFY25 over 1HFY25.

* For our coverage universe, we estimate volume growth of ~8% YoY in 2HFY25. We estimate realization to improve by ~1% sequentially (down ~5% YoY) in 2HFY25. EBITDA/t is estimated to improve ~23% sequentially (down ~15% YoY) in 2HFY25, led by improvement in realization, positive operating leverage, favorable fuel prices and cost efficiency initiatives (increase in green power share, alternative fuel share, logistics cost optimization and plant efficiency improvement).

* We estimate clinker utilization will improve to 81%/98% in 3Q/4QFY25 from ~75% in 2QFY25. Historically, higher clinker utilization in 4Q-exit has supported pricing power for the industry. An improvement in clinker utilization, coupled with sustained price increases, could lead to positive earnings surprises for our FY26/FY27 estimates.

Top picks are UTCEM, ACEM and JKCE

* We are structurally positive on the industry. We prefer players with a balanced geographic mix, higher capacity utilizations, and a strong track record of capacity expansion and successfully integration.

* Further, we are positive on the companies that have a strong presence in North, Central and West regions. We believe these regions are less vulnerable to the demand-supply mismatch and volatility in the cement price.

* UTCEM is our top pick in the cement space. We are also positive on ACEM and JKCE.

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