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Cement & Building Materials (Tiles) - Results Preview - Robust Performance on Improved Volume - Reliance Securities

Posted On: 2021-01-12 03:52:45 (Time Zone: Arizona, USA)


Cement industry is expected to continue its robust performance in 3QFY21 as well, mainly led by rebound in volume notwithstanding cost pressure and sequential decline in average realization. A healthy recovery in demand scenario post monsoon led by pick-up in construction activities across regions augurs well for the cement companies. Higher sales volume and improving utilization are also likely to negate the adverse impact of higher fuel and input prices. Average sales volume of the cement companies under our coverage universe is expected to increase by ~7% YoY and 15% QoQ mainly led by sharp recovery in Eastern, Northern and Central markets. It is heartening to see that improvement in real estate demand contributed to quarterly volume growth, which has offset the adverse impact of softening demand from rural areas led by farmers' agitation on new Farm Bills. However, ~2% QoQ contraction in realization at all-India level, higher pet-coke prices (21% QoQ and 38% YoY rise in Reliance Petcoke price) and increase in discretionary expenditures are likely to negate the benefit of higher utilization. We expect lower realization and higher cost to impact EBITDA/tonne of the companies in the range of Rs60-330/tonne sequentially. Unitary EBITDA of the companies like Shree Cement (Rs1,261), UltraTech Cement (Rs1,214), Ramco Cements (Rs1,484), Sagar Cements (Rs1,265) and JK Cement (Rs1,184) are likely to remain healthy above Rs1,000. However, the other players are expected to report unitary EBITDA in the range of Rs600-950. Notably, average EBITDA and APAT of the cement companies under our coverage are likely to increase by ~38% and ~66%, respectively in 3QFY21.

Demand Witnessed Steady Recovery

Demand momentum, which remained soft in 1HFY21 owing to lockdown and monsoon, witnessed a healthy recovery in 3QFY21 mainly led by improved availability of labourers at work sites, continued traction in retail demand and pick-up in real estate demand. Notably, demand momentum in Eastern, Northern and Central regions continued to remain relatively better than other regions, while demand momentum in Western region also witnessed up-tick due to pick-up in real estate segment. The companies under our coverage universe are likely to witness average sales volume growth of 7.3% YoY. JK Cement is likely to report the best volume growth (up 24% YoY), followed by Shree Cement (up 15% YoY), Sagar Cement (up 13% YoY) JK Lakshmi Cement (up 11% YoY) and UltraTech Cement (up 10% YoY).

Weak Realisation & Higher Operating Cost to Weigh on Performance

Contrary to expectation, average realization witnessed further sequential contraction, which along with higher operating cost (led by surge in diesel and pet-coke prices) is likely to negate the impact of higher capacity utilization on sequential basis. Our channel check suggests that all-India average price (trade segment) declined by 1.8% QoQ (up 4.3% YoY) with all regions barring Northern region, which witnessed sequential decline in the range of 1.3-2.8%. Further, drop in non-trade prices was bit steeper than the trade segment. Hence, we expect the companies to report average 2-3% sequential price drop during the quarter. Additionally, pet-coke prices (domestic and USA) soared >20% QoQ, which along with impact of higher diesel prices is likely to impact EBITDA/tonne of the companies under our coverage to the extent of ~Rs60-330 on sequential comparison.

Building Materials: Volume Trajectory Improved Led by Rebound in Export & Domestic Demand

As per our channel check, volume of the organized tiles manufacturers witnessed sharp improvement on the back of opening up of export markets and sustained domestic demand mainly aided by pick-up in demand in affordable housing segment in Tier-II and Tier-III cities. Additionally, shift of consumers' preference towards organized and branded players has also aided the volume performance of the organized players. We expect sales volume of Kajaria Ceramics and Somany Ceramics to increase by ~11.5% YoY and ~12.8% YoY, respectively. Further, stable realization, low gas prices and improved utilization are likely to help the companies to register double-digit growth in profitability.

Our View: Cement industry is expected to see healthy demand traction in 4QFY21E and FY22E mainly led by sustained improvement in construction and real estate activities. Strong demand from rural markets led by favourable monsoon, visible traction in real estate demand and governments' persistent focus on expediting infrastructure activities are likely to remain the key tailwinds for the industry. However, sharp rise in fuel prices and absence of price hikes could be near-to-medium-term concerns for the industry. UltraTech Cement, JK Cement and JK Lakshmi Cement continue to remain our preferred picks.

Our Top Results Picks: UltraTech, Ramco Cements, Shree Cement and JK Cement

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Source: Equity Bulls

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