Cement spreads expected to remain strong in second half of FY21: Motilal Oswal Financial Services

MUMBAI: Contrary to historical trends of lower cement prices in the third quarter of the calendar year over previous quarter due to softness in demand owing to the festive season (Diwali) as well as lower exit prices in Q2 on account of the monsoon, cement prices have surprised by rising this year, according to a report by Motilal Oswal Financial Services.

Even as variable costs rise, cement spreads are expected to remain strong in the second half of FY 2020-21 on expected pricing strength, said the report.

Volume recovery post the lifting of Covid-19 led restrictions has continued to gain strength. After growing by 5 per cent year-on-year (YoY) in the June quarter, Motilal Oswal Financial Services expects volumes for its coverage universe to grow 12 per cent YoY in 2H of FY21.

In the September quarter, average price is up 0.8 per cent QoQ so far across India compared with a decline of 1.1 per cent QoQ seen in the past 5-10 years. As per the channel checks, volumes are growing over 10 per cent YoY in North, East and Central India, according to the brokerage.

“While demand has remained weak in the South and Maharashtra, it has recovered strongly from the 15-20 per cent YoY decline seen in the June Quarter. Prices in South India have been particularly strong and are up 18 per cent YoY. Prices in North/West/Central are up 7 per cent/ 6 per cent/ 5 per cent YoY and 3 per cent/ 1 per cent/ 2 per cent QoQ,” stated the report.

Motilal Oswal Financial Services revises its estimates to factor in the higher cement prices seen in Q3 and expected seasonal hikes in Q4, which is the peak demand season. Motilal Oswal Financial Services raised FY21E/FY22E EBITDA estimates by 5 per cent/2 per cent driven by higher realization and cost reduction measures and raised FY21E/FY22E PAT estimates by 7 per cent/4 per cent.