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Q2FY24E has always been an operationally muted quarter for the cement industry, where prices often get moderated which drags the margin. However, the demand remained resilient aided by the infra & real estate segment, as a result we believe the industry to see a double-digit volume growth in Q2FY24E. During Jul-Sep’23, cement prices moderated q/q due to seasonal weakness coupled with higher dispatches to sustain sequential volume growth. Consequently, we believe industry’s NSR to moderate by 2-3% on both y/y & q/q. However, revenue is expected to grow by 12% y/y, primarily driven by strong volume growth in Q2FY24E. Given the steady correction in energy cost, the 3-month trailing blended fuel cost corrected to Rs1.5 per kcal/kg vis-à-vis ~Rs2.16 per kcal/kg in Q1FY24. Hence, we believe this cost moderation savings will start reflecting from Q3FY24 onwards. While the industry power & fuel cost can see another correction of Rs100-150/te in Q2FY24E v/s Q1FY24, translating the industry EBITDA to flat/marginal decline sequentially to +Rs850/te

* Demand Outlook: We expect volumes of our coverage companies to increase by +15% y/y owing to strong demand momentum backed by the infra segment, while sequentially it is expected to decline by 10%. According to DPIIT, cement volume increased by +13% y/y during Jul-Aug’23 and our channel check indicated that the demand momentum continued in Sep’23 as well. In Q2FY24E, demand was largely driven by the strong infra & construction activities led by the upcoming election. We believe companies like SGC will deliver a strong volume growth of +30% y/y on account of low base and recently acquired ACL assets. JKLC & BCORP should report high single-digit volume growth due to limited headroom for production.

* Pricing Outlook: We expect NSR of our coverage companies to decline by 2-3% y/y and q/q both in Q2FY24E. During Jul-Sep’23, All-India average cement price remained flat y/y, although corrected by 2% q/q as players pushed higher dispatches to sustain sequential volume growth. Despite the significant price increase in East and South during Sep’23, the avg Q2FY24 price remained 2% and 7% lower as compared to avg Q1FY24 prices. Whereas the avg Q2FY24 prices in North/Central inched up by +2-3% q/q and West remained flat q/q. As a result, the players operating in south/east could witness significant NSR fall by 3-4% q/q.

* Cost Outlook: The fuel prices corrected significantly from its peak (Pet coke/Imported coal to $105/110/te in Jun’23 from $240/355/te in Jun’22, respectively). As a result, 3-month trailing blended fuel cost corrected to Rs1.5 per kcal/kg vis-à-vis ~Rs2.16 per kcal/kg (indicated by the companies) in Q1FY24. Therefore, we expect the industry power & fuel cost to decline further by Rs100- 150/te in Q2FY24E as compared to Q1FY24, which will aid to maintain the industry EBITDA close to +Rs850/te, even after NSR moderation.

* Key commentary to monitor: Going forward, we believe the rising fuel cost (Pet coke and Imported coal rebound to $130 and $142/te by Sep’23 end.) can limit the expected gains anticipated from moderating power cost (Rs300/te v/s earlier Rs400/te on Q4FY23 exit).

We are cautiously POSITIVE taking the cognizance of rising fuel cost, which we believe can be mitigated through a healthy pricing environment in subsequent quarters. Our top picks UTCEM, DALBHARA, SGC & ORCMNT.

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