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We recently hosted a call with an expert with more than 20 years of experience in the cement industry. KTAs from the call: 1) The South, West and North saw price absorption (in the Rs10-50/bag range) in Oct-23, while the eastern region witnessed sharp improvement in prices (of Rs45-50/bag) in Sep-23. 2) The price absorption was mainly on the back of demand and better pricing discipline. 3) Demand outlook is robust, at 8-9% CAGR over FY24E-26E, while supply will be largely driven by the top few players. Our top-pick: UltraTech.

Price hikes seen in the South, West and North region in Oct-23; prices in the East noted an increase earlier, in Sep-23 Average pan-India cement prices are likely to have augmented 5% MoM in Oct 23 (higher by 6% from the average price in Q2), with the South accounting for a large part of the increase. Our channel checks suggest that prices have increased by Rs50-60/bag in Tamil Nadu, by Rs35-40/bag in Andhra Pradesh/Telangana, and by Rs20-25/bag in Karnataka/Kerala in Oct-23. To recap, prices in Tamil Nadu had fallen more than Rs40- 45/bag in H1FY24. In the North, prices have increased by Rs10-12/bag, while improving by Rs18-20/bag in Maharashtra. Eastern India had already witnessed a sharp price increase of Rs45-50/bag earlier, in Sep-23; prices have sustained since then.

Improving demand and better pricing discipline resulting in price absorption Cement price-hikes in FY23 (over 5%) were not sufficient to cover the significant rise in fuel costs, which had dented profitability for cement companies. Improving demand and better pricing discipline supported the successful absorption of the price hikes. Prices in Q2FY24 also remained firm, despite the quarter being seasonally weak (generally witnesses a drop of ~Rs15/bag QoQ). For that reason, we anticipate average EBITDA/ton to remain broadly flat sequentially (vs seasonal decline of more than Rs200/ton) at Rs922 in Q2FY24. Demand outlook is robust, at 8-9% CAGR over FY24E-26E, led by infrastructure spending. We estimate FY24E to be the third consecutive year of doubledigit volume growth.

Fuel prices remain stable in the first fortnight of Oct-23 US petcoke prices remained largely stable at USD127/ton (down 35% YoY) in Oct-23TD, whereas domestic petcoke prices declined by Rs669/ton MoM in Oct-23 to Rs13,660 (down 25% YoY and 5% MoM). The upcoming quarters are likely to witness twin benefits—of the recent price hike and lower input prices. Based on this, coupled with better operating leverage, we estimate profitability to sharply improve in H2FY24E. 

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