We expect the asbestos cement sheet (ACS) industry to continue witnessing strong demand and pricing tailwinds in FY21 on the back of healthy rural demand. Being an oligopoly industry with the top-6 players accounting for ~80% of the industry size (Rs39bn, or 3.6mn-mtpa), we believe players with pan-India presence (HIL, Visaka, and Everest) are likely to witness strong earnings growth in FY21E. Besides healthy demand, pricing in the industry too held up in Q2 and Q3-TD (despite being seasonally weak quarters) and is expected to remain firm through the current fiscal. Our recent channel checks suggest: a) strong double-digit volume growth achieved by HIL in Q2FY21 while Visaka Industries and Everest Industries registered flat to low single-digit volume growth; and b) HIL's pricing is somewhat higher (QoQ) compared to its immediate peers.
- Higher rural income and steel sheet prices (alternative to ACS) to drive ACS industry growth over FY20-FY22E. Demand tailwind in ACS is likely to be driven by: 1) higher farm income through recent hike in MSP prices and back to back better monsoons; 2) migration of workers to rural areas in the wake of Covid breakout and higher allocation of Covid relief funds for rural India; 3) firm domestic steel prices (boosted by the adverse sentiment on China) making steel sheet prices relatively higher vs ACS. With these firm drivers likely to sustain in the near term, we expect ACS industry volumes to grow at 5-7% in FY21.
- ACS pricing remains unusually firm in an otherwise off-season period. Our channel checks across regions indicate ACS pricing is down by a mere 4-5% QoQ after rising by ~15% in Q1FY21. This limited price decline is due to sustained demand from rural India and firm pricing in steel-coated sheets. We thus expect Q2/Q3 realisations for top pan-India ACS players to show a high single-digit to low double-digit growth YoY in the current fiscal. If the strong demand sustains into Q4 (which marks the onset of seasonal demand) as well, we might witness ACS pricing to trend incrementally higher, which would drive strong realisations and profitability for the top ACS players in FY21.
- VSKI and HIL to be the biggest beneficiaries of industry tailwinds. We expect VSKI to sustain its strong volumes and profitability in its ACS segment in the current fiscal. HIL on the other hand is likely to stage a strong comeback after having faced muted demand and challenges w.r.t. sourcing of asbestos fibre in the base year (FY20). While Everest too would benefit from the industry tailwinds, it is likely to post lower earnings growth among its top peers (HIL and VSKI) due to higher volumes in the base year and aggressive pricing.
- Maintain BUY on VSKI with target price at Rs552. We expect VSKI to report overall revenue and PAT CAGRs of 6.3% and 27.2% respectively over FY20- FY22E. Higher profitability and stricter working capital discipline leading to sizeable paring of debt would aid VSKI in improving its RoCEs to 15%. We maintain BUY on the stock with an unchanged target price of Rs552, valuing it at 12x FY22E earnings.