Cement: Better Realization Cushioning the Impact of Higher Costs
Motilal Oswal Financial Services Ltd 4QFY21 Results Review Cement sector witnessed 69% YoY growth in profit v/s our estimate of 55%, aided by strong demand from Real Estate and Infrastructure, higher realization on firm prices, and strong margins, supported by better fixed cost absorption (from higher volumes. Volumes up 24% YoY: Cement companies under our coverage clocked 24% YoY volume growth on strong demand and lower base effect (4QFY20: -12%). This was attributable to a strong uptick seen in 4QFY21 in urban Real Estate and Infrastructure activity, coupled with strong rural demand. JKCE, UTCEM, and ACEM fared better than others, with higher volume growth (25-50% YoY), driven by market share gains on account of a ramp-up in newly commissioned capacities. Demand in South India picked up well in 4QFY21, led by a strong uptick in Andhra Pradesh and Telangana, which is evident from the ~10% growth in Cement volumes recorded by ICEM and TRCL. Owing to the strong pricing environment, realization for our coverage universe improved by 1% QoQ and 4% YoY. As a result, aggregate revenue for our coverage universe (excluding GRASIM) grew 29% YoY to INR381.2b. Profitability driven by better realization: Most companies in our coverage reported strong margins, supported by higher realization and better fixed cost absorption (from higher volumes), but was partially offset by higher raw material cost. EBITDA for stocks under our coverage improved 15% YoY (+2% QoQ) to INR1,235/t on the back of better realization (+4% YoY/+1% QoQ), which was partially offset by higher cost/t (+1% YoY/+1% QoQ). Aggregate EBITDA/PAT was up 43%/58% YoY to INR92.3b/INR48.9b. Including GRASIM, EBITDA/PAT for our coverage universe was up 46%/68% YoY. Deleveraging continues: Deleveraging continued with UTCEM/DALBHARA/JKLC paring down their net debt by INR27.2b/INR13b/INR1.5b to INR67.2b/INR1b/INR4b in 4QFY21. We expect it to continue on the back of improvement in OCF, led by robust demand. Although JKCE will be raising INR18-20b in debt for its Panna capex, it has guided to keep net debt below INR25b over the course of this expansion. Higher fuel cost to impact margins; emphasis on green energy: Companies expect petcoke costs to stabilize and peak out soon as production improves at refineries across the globe. In the near-term, companies expect higher fuel costs to impact margins. However, that should be offset by better pricing and better fixed cost absorption. Managements have also enhanced focus on achieving carbon reductions and are cutting reliance on coal-based power sources by putting up a waste heat recovery system (WHRS) and renewable energy plants. JKCE has entered into an agreement for procuring 20MW of solar and wind power for existing plants. Top picks: We expect demand to improve from Jun’21 onwards as the lockdowns ease gradually. 1QFY22 should still see a 30-35% QoQ decline in volumes. While we maintain our expectation of 10% volume growth in FY22 (on a low base of FY21), any extended lockdown is a key monitorable risk. We expect 10% volume CAGR over FY21- 23E, which should improve industry clinker utilization to over 80% (and over 85% in North and Central India). Eastern India, with ~25% capacity growth over the next 18 months, is the worst placed and is thus our least preferred region. With improving demand outlook, we prefer companies that: a) are moving down the cost curve, b) have potential for market share gains, and c) provide valuation comfort. UTCEM is our top largecap picks, while DALBHARA and JKCE are our top midcap pick.
Tags : Interviews Cement Renewable Energy Infrastructure revenue EBITDA green energy MOFSL Raw Material Cost Higher Costs