16 Aug 2023 , 10:45 AM
In Q1FY24, profitability for analysts of IIFL Capital Services Cement coverage companies was marginally better than their estimates, driven by higher volume growth. Q1 volumes grew by 17% YoY for their coverage universe — better than 10-12% YoY volume growth estimated for the industry implying market share gains and further consolidation by large players. Profitability was broadly in line with estimates, as Ebitda/t grew 4% QoQ (-5% YoY) to Rs 979/t, as benefits of softening costs were offset by weaker realisations in the industry. Analysts of IIFL Capital Services have seen minor increase in their Ebitda estimates for coverage – 2% in FY25; as sharp uptick in Ambuja Cement has been offset by minor cuts due to gradual profitability built in for others.
Management commentary suggests: 1) Near-term demand outlook remains strong, pickup expected post monsoon. 2) Race for market share gains to keep realisations subdued in near term. 3) Cost tailwinds of spot energy prices to reflect in H2FY24. Analysts of IIFL Capital Services believe companies are likely to focus on volume growth in near term instead of price hike. Thus, any improvement in Ebitda/t would be driven by lower fuel prices and operating leverage benefits. Valuations seem to be pricing in nearterm earnings and the stock may consolidate at the current levels. However, given the strong demand momentum, analysts of IIFL Capital Services maintain their positive bias on the sector from a medium-to-long-term perspective. Their picks in the sector are UltraTech Cement, Dalmia Bharat, JK Cement and JK Lakshmi.
Strong volume growth on structural demand tailwinds:
In Q1FY24, Cement volumes for coverage companies grew 17% YoY – marginally better than estimates. Within analysts of IIFL Capital Services coverage universe, capacity additions by large players like Ultratech, Ramco, JK Cements over FY23 have yielded aboveindustry volume growth — estimated to increase at 10-12% YoY in Q1. This has resulted in large players gaining further market share at the expense of small and regional players and increasing market consolidation in the industry. Additionally, analysts of IIFL Capital Services saw Dalmia and Ramco lost market share in East, due to pricing strategy and rake unavailability respectively. Ultratech and Shree seem to be the key beneficiary of this. Analysts of IIFL Capital Services believe this trend is likely to continue in near term, given the strong capacity pipeline announced by large players. Further, despite ~35mnt of grinding capacity added in FY23, utilisations in Q1 have improved to 84% vs 80% YoY, suggesting strong underlying demand aided by government’s push on Housing and Infrastructure segments. Pan-India peers like Ambuja (on consol. basis) and UTCEM saw the highest capacity utilisations (~90%) in Q1. UTCEM remains a dominant market leader in the sector; in spite of adding 15mnt capacity in the last 12 months, it has achieved 89% utilisations in Q1. While Q2 may see slackness in demand due to monsoon, analysts of IIFL Capital Services foresee near-term demand remaining robust, aided by strong pre-election demand in H2FY24. They estimate volumes to grow by 14% in FY24 and 9% in FY25.
Weaker realisations decelerate improvement in profitability:
Historically, Cement realisations witness QoQ uptick in Q1, due to seasonally strong construction period. However, increasing competitive intensity due to recent capacity additions and strong underlying demand in Q1 — led to Cement companies resorting to volumes and market share gains to enhance overall profitability. Moreover, sharp decline in global Energy prices in H1CY23 provided profitability cushion to companies, so as to focus on volume lever to drive Ebitda. Resultantly, Cement realisations declined ~2% QoQ in Q1, negating for cost benefits accrued on lower energy costs and better operating leverage benefits. For analysts of IIFL Capital Services coverage, Ebitda/t grew 4% QoQ (-5% YoY) to Rs 979/t – broadly in line with expectations. Ambuja reported the highest Q1 profitability in the industry – Ebitda/t was up 37% YoY and 23% QoQ to Rs1,082/t – on sharp reduction in power & fuel costs and steady realisations QoQ – compared to fall seen for industry peers. They believe realisations are expected to remain subdued in the near term, given the increased competitive intensity. For July, they have seen minor price hikes been undertaken across regions; however, sustainability remains key in seasonally weak Q2FY24.
Cost tailwinds to continue in H2FY24: Operating costs across all Cement companies saw further reduction in Q1; largely on lower raw materials + power & fuel costs (combined) as companies partially reflect benefits of lower cost fuel consumption. On Cost/Kcal basis, imported petcoke remains relatively cheaper vs coal. Petcoke prices have sharply declined by ~50% YoY (down 27% QoQ) to US$125 in Q1FY24. On imported coal, prices in Q1 are down by 25% to 60% YoY with highest decline observed in Newcastle coal. While management has guided for further sequential moderation in fuel costs in Q2, benefit of spot prices are likely to reflect in H2FY24. July’23 saw further price cuts for coal and petcoke (US$110). Given time lag of 4-6 months between spot prices and actual consumptions, they believe energy costs will provide further cost savings and aid profitability in FY24. However, it is unlikely for cement companies to realise entire cost benefit and expect part of it to be offset for weaker realisations.
Current valuations price in robust FY24 outlook; structural story intact:
On 1YF EV/Ebitda, Cement coverage is currently trading at 14.5x, largely in line with its historical averages. Analysts of IIFL Capital Services believe current valuations are pricing in near-term earnings outlook and provides limited upside at current prices. However, given strong demand momentum in near term, partly fuelled by expectations of pre-election demand, is likely to drive earnings growth. On supply front, analysts of IIFL Capital Services foresee nearly 35mnt capacity additions in FY24 (6% YoY), largely in the East and South regions by top peers. They believe further consolidation is also likely to bring in better price discipline in the industry, which in turn is likely to drive higher profitability. They estimate sector’s Ebitda to grow by 20% Cagr over FY23-26 (15% over FY24-26). Analysts of IIFL Capital Services maintain their positive bias on the sector from medium-to-long term perspective – their picks in the sector are UltraTech Cement, Dalmia Bharat, JK Cement and JK Lakshmi.
Related Tags
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
IIFL Capital Services Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
ARN NO : 47791 (AMFI Registered Mutual Fund Distributor)
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.