The coronavirus (COVID-19) pandemic has dented the prospects of the Indian cement sector. Besides materially dragging the sector’s improving utilisation curve, the virus outbreak has also pushed ahead the emerging pricing power of companies in north and central India by at least two years.
Clinker utilisation across the country is likely to drop to 62%/72% in FY21/FY22 from 79% in FY19 on account of a 3.5% capacity CAGR amid weak expected volumes. Given the sub-optimal utilisation expected across regions, sustenance of production discipline would be the key to prices and margins. This would be tougher to achieve for regions with higher capacity growth such as east India which has seen a 30% rise in capacity.
“Due to the impact of COVID-19, we have cut our FY21 EBITDA/PAT estimates by 23-38%/31-60% for cement companies under our coverage,” Motilal Oswal Research said in a note to its clients.
“In such an uncertain demand environment, we prefer companies that are moving down the cost curve, have a strong balance sheet and provide valuation comfort,” it added, with UltraTech and ACC as its top picks in the large cap. While the COVID-19 impact on volume is still uncertain, the demand is likely to fall 30%/15% year-on-year in the first half of FY21/FY21 for the industry, assuming a return to normalcy post monsoon i.e. second half FY21, it said.
“We expect FY22E volumes to grow 20% y-o-y to 338 MT, which would imply a 0% CAGR in FY19-22E. We expect the first leg of volume recovery to be driven by infrastructure (~22% of volume) followed by rural and low-cost housing (~43% of volume,” said the note.