Cement: Price hike brightens up sector prospects

21 Nov 2023 , 11:59 AM

Strong underlying demand in the Cement sector resulted in 12% YoY volume growth in Q2FY24, for analysts of IIFL Capital Services coverage universe. Despite the constant capacity additions (35mn MT added in the last 12 months), sector utilisation improved for the sixth consecutive quarter. Profitability too, improved by 16% YoY to Rs959 in H1FY24; largely owing to lower operating costs. Over the Q2 call, companies were sanguine about demand growth and expected operating costs to moderate in H2FY24. This, coupled with sharp cement price hike over the last two months (7-8%), would drive H2 profitability. Analysts of IIFL Capital Services estimate their H2FY24 volumes to grow by 12% YoY and Ebitda/t to increase by 30% YoY to Rs1,162. Analysts of IIFL Capital Services upgrade their sector Ebitda estimates by 3- 4% as they bake in recent price increases. They continue to maintain their positive stance on the sector; their preferred pick are UltraTech Cement, Dalmia Bharat and JK Lakshmi. 

Demand keeping pace with capacity additions: 

Capacity utilisation for analysts of IIFL Capital Services coverage universe has improved, on a YoY basis, for the sixth consecutive quarter in Q2FY24. They note that despite 35mn MT capacity addition in the last 12 months — 11% of year-ago capacity — the utilisation improved by 170bps YoY to 75%. In Q2FY24 earning’s calls, companies were sanguine about the volume growth and believe that the industry would grow in double digits in FY24. In Q2FY24 and H1FY24– volumes of analysts of IIFL Capital Services coverage universe grew by 12.5% YoY and 14.6% YoY respectively. Their channel checks suggest that volume growth was strong in October; however, it did slow down in November due to festival holidays and elections in five states. However, there was a consensus across dealers that demand would pick up from December onwards. In H2FY24, analysts of IIFL Capital Services expect sector volumes to grow by 12% YoY and utilisations to improve by 200bps YoY to 85% (and vs 80% in H1FY24). 

Price hikes to aid profitability in H2FY24: 

Cement sector profitability bottomed out in Q2FY23, when sector Ebitda/t was at Rs618. Sharp increase in power and fuel cost, coupled with lower realisation during the lean quarter weighed on sector profitability. However, since then, the profitability has improved due to the fall in fuel prices and benefits of operating leverage. Resultantly, Ebitda/t was up 53% YoY to Rs944 in Q2FY24 and 16% YoY to Rs959 in H1FY24. Over September-October, companies have taken sharp price hikes – up 7-8% since August-end prices, which would drive H2FY24 profitability. On Q3TD basis, prices are up 5-6% or by Rs20/bag (Rs15/bag ex of GST) – this alone could improve the profitability by up to Rs300/t. This, coupled with likely sequential decline in operating costs (based on management commentaries) is likely to drive H2 profitability. Analysts of IIFL Capital Services estimate – Ebitda per tonne for their sector coverage to improve by 30% YoY to Rs1,162 (or by 20% vs H1FY24 average).

Upgrade sector Ebitda by 3-4%; profitability of Central India focused players to be weak: 

Analysts of IIFL Capital Services upgrade their sector Ebitda estimates by 3-4% over FY24-26, as they account for the sharp price increases taken in the last two months. Across companies, range of earnings change varies from -15% to +15% as players concentrated in Central India would see a more subdued price increase. Within analysts of IIFL Capital Services coverage – they have cut estimates for Heidelberg Cement India and ACC – as the profitability is likely to be lower than their initial expectations. 

Maintain positive stance on the sector: 

With the strong demand momentum continuing, aided by Housing and Infrastructure segments, and outlook on profitability improving with recent price hikes – analysts of IIFL Capital Services believe Cement could see further earnings upgrade. Within the sector, their preferred picks are UltraTech Cement, Dalmia Bharat and JK Lakshmi.