Volume recovery post the lifting of COVID-19 led restrictions has continued to gain strength.
According to the cement report from Motilal Oswal Financial Services, contrary to historical trends of lower cement prices QoQ in the third quarter of the calendar year 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.
Even as variable costs rise, cement spreads (price minus power and fuel and freight costs) are expected to remain strong in 2HFY21 on expected pricing strength.
Volume recovery post the lifting of COVID-19 led restrictions has continued to gain strength. After growing by 5% YoY in 2QFY21, Motilal Oswal Financial Services expects volumes for its coverage universe to grow 12% YoY in 2HFY21E.
In 3QFY21, average price is up 0.8% QoQ so far across India v/s a decline of 1.1%/ 0.7% QoQ seen in the past 5-10 years. The same is up ~7% YoY to INR360/bag. As per the channel checks, volumes are growing over 10% YoY in North, East and Central India. While demand has remained weak in the South and Maharashtra, it has recovered strongly from the 15-20% YoY decline seen in 2QFY21.
Prices in South India have been particularly strong and is up 18% YoY (flat QoQ). Prices in North/West/Central are up 7%/ 6%/ 5% YoY and 3%/ 1%/ 2% QoQ. Non-trade prices have also recovered, particularly in North where it had fallen sharply, as institutional demand (from urban real estate, infrastructure, etc.) has been improving.
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%/2% driven by higher realization and cost reduction measures and raised FY21E/FY22E PAT estimates by 7%/4%. UTCEM is the top large-cap pick and DALBHARA top mid-cap pick.
| Costs – Rise in power and fuel to be offset by lower fixed costs |
Lower energy cost has been a tailwind for the cement sector in the past year. Power and fuel cost declined for the fifth successive quarter in 2QFY21, with companies under our coverage reporting an average decline of 18% YoY. Freight 24 November 2020 cost also declined by 2% YoY in 2QFY21. However, this is now likely to reverse as both pet coke and diesel prices have risen substantially.
Pet coke prices are is up 32% YoY to USD96/t (up 60% v/s Apr’20). To mitigate the impact of higher pet coke prices, cement producers have increased usage of imported coal, prices of which are down ~3% YoY. Motilal Oswal Financial Services thus estimate a INR90- 100/t, or ~10% increase, in power and fuel cost in 3QFY21.
Diesel price is up 13% YoY due to increase in duties levied by the government. Lower rail freight and steps taken by the industry to optimize logistic cost has however neutralized the impact of higher diesel price.
1HFY21 saw ~10% fall in other expenses due to savings on fixed costs (travel, administration, repairs, advertising and promotions, etc.). While these spends should gradually normalize, Motilal Oswal Financial Services expects it to remain low even in 2HFY21. Lower fixed costs and higher operating leverage (from strong volumes) should largely neutralize the increase in power and fuel cost and lead to marginally lower total costs YoY even in 2HFY21.
| South – Production discipline going strong |
The cement industry in the South has exhibited strong production discipline in the face of weak volumes. Led by hikes of INR70-90/bag (~20%) in Apr-May’20, prices in the South are still up ~INR60/bag, or 18% YoY to INR393/bag in 3QFY21. On a QoQ basis, prices are flattish as hikes in Nov’20 have neutralized the declines of Sep-Oct’20.
Prices are up 39%/12%/14%/13% YoY in Andhra Pradesh/Tamil Nadu/Karnataka/Kerala.
| North and Central – Prices rise even on a high base |
Demand is North and Central India has gained momentum as the monsoons subside. While some softness in demand has been observed in the last few weeks due to festive season (Diwali and Chhath), it is likely to now pick up again as migrant labor returns to construction sites. Led by strong demand, prices in North have risen by INR13/bag, or 3%/7% QoQ/YoY to INR389/bag. Prices in Central India have also risen by INR8/bag, or 2%/5% QoQ/YoY to INR356/bag, led by hikes in both Uttar Pradesh and Madhya Pradesh.
Non-trade prices have also recovered after the sharp declines of INR40-50/bag seen in 2QFY21. Trade-non trade price gap has started normalizing back to INR50-60/bag.
| West – Mixed demand trends, but prices improving |
Cement demand in Maharashtra has been one of the most impacted in the country due to the COVID-19 pandemic. The state continues to see some decline in demand (though lower than the ~20% YoY decline in 2QFY21) on account of lower labor availability, weak urban real estate demand, and slow infrastructure activity.
Demand in Gujarat has recovered with volumes growing 5-10% YoY. Prices in Maharashtra though are up 2%/10% QoQ/YoY to INR354/bag, supported by higher prices in the South, which is a key supplier to the state. The same for Gujarat remained steady QoQ (up 3% YoY) at INR350/t. As a result, prices in the West are currently up 1% QoQ (6% YoY) to INR352/bag.
| East – Weakest pricing among all regions |
Demand in the East has been the strongest of all regions supported by government spending as well as increased labor availability as migrant workers returned back to their hometowns due to the COVID-19 pandemic. Due to the supply overhang, East has also seen the weakest pricing among all other the regions in the past three years, with current prices lower than those 3 years back. The rest of the country, meanwhile, has seen an over 10% increase in prices in this period. Pricing in the East has been weak, declining by ~INR25/bag since May’20.
Cement prices have declined ~2% QoQ due to the festive season. However, prices are marginally higher YoY at INR324/bag. Motilal Oswal Financial Services believes the weak pricing in the East is due to aggressive capacity expansions and an exacerbated fight for market share among the various players (SRCM, UTCEM, DALBHARA, ACC, TRCL, Nuvoco Vistas Corporation, etc.) in this region. The price in the East is expected to underperform over the next 18 months as ~25% regional capacity expansion by various players is in the pipeline.
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