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Cement & Building Materials - Results Preview - Cost Inflations to Weigh on Performance - Reliance Research

Posted On: 2021-10-10 16:02:01 (Time Zone: IST)

A sharp increase in operating cost in the forms of higher input and fuel prices is expected to weigh on 2QFY22 performance of cement companies. Further, a seasonal decline in realisations is expected to be a double whammy for cement companies in 2QFY22. While the heavy downpour in various parts of the country and continued labour shortages impacted demand, sustained demand from infrastructure segment aided the cement companies to maintain the dispatches growth on a yearly comparison. Average sales volume of the cement companies under our coverage universe is expected to increase by a robust ~7% YoY (flat QoQ).

We further note that an improvement in real estate and industrial demand also contributed to volume growth, which negated the adverse impact of a soft rural demand. Our channel check suggests that the all-India average price contracted ~3% sequentially in 2QFY22, mainly led by a sharp over 5% QoQ price contraction witnessed in Southern and Eastern regions. Additionally, companies are unlikely to get the benefit of transition from pet coke to coal during the quarter, as the imported coal prices and e-auctioned coal prices have also gone up significantly during the quarter. We expect cost inflation to lead to an average sequential jump of Rs100-160/tonne in the operating cost. Despite cost pressure and realization dip, unitary EBITDA of companies like UltraTech Cement (Rs1,350), Ramco Cements (Rs1,263), Shree Cement (Rs1,203), Ambuja Cements (Rs1,177) and JK Cement (Rs1,444) is likely to remain healthy in excess of Rs1,000. However, other players are expected to report unitary EBITDA in the range of Rs600-900. Notably, the average EBITDA of cement companies under our coverage are likely to decrease by ~2% YoY and ~16% QoQ in 2QFY22E.

Demand Remained Steady Despite Seasonal Effects

While a heavy downpour in various parts of the country, sand issues, labour availability issues and transportation strike in select states impacted demand for most cement companies, the restart of economic activities post second COVID wave and sustained demand from infrastructure projects enabled the industry to record a steady volume on YoY comparison during the quarter. We further believe that the demand momentum will witness an acceleration in the coming months, as all four key drivers of cement consumption have started to witness a healthy traction. While the average sales volume of companies under our coverage universe is likely to grow by 7% YoY, it is likely to witness a flat growth QoQ. From our coverage list, JK Cement and Sagar Cements are likely to report a robust volume growth of over 20% YoY. While UltraTech Cement, Ambuja Cements, Ramco Cements and JK Lakshmi Cement are likely to report 8-9% YoY volume growth, Shree Cement is expected to record 2% YoY decline in volume.

Cost Inflation and Soft Realization to Weigh on Performance

A sharp jump in domestic and international pet coke prices of 80-110% YoY (up 20-35% QoQ) and higher freight cost, due to the increased diesel prices, are likely to result in ~Rs100-160/tonne sequential increase in unitary operating cost. Further, domestic and international coal prices have witnessed a sharp increase in recent months. Thus, no meaningful cost spread is left between pet coke and coal. Hence, the impact of higher fuel costs will be felt by all companies depending on low-cost inventories. Further, the all-India average price (trade segment) contracted by ~3% QoQ (flat YoY), which essentially exerts pressure on the operating performance of companies. Barring ACC, Ambuja Cements, UltraTech, JK Cement and Mangalam Cement, all companies are expected to report a YoY degrowth in EBITDA at 20-40%.

Building Materials: Volume to Record Strong Rebound

While the second COVID wave has significantly impacted the sales volume of building materials in 1QFY22, tiles manufacturing companies -- Kajaria Ceramics (KJC) and Somany Ceramics (SOMC) -- witnessed a strong volume recovery in 2QFY22 led by pent-up demand and sustained traction from the real estate segment. Further, a shift in consumers preference for the organized/branded players has already boosted their volume performance. Additionally, tiles and sanitaryware manufacturers have taken modest price hikes during the quarter to contain the impact of higher gas prices. We expect KJC and SOMC's sales volume to increase by ~11.1% YoY and ~11.4% YoY respectively in 2QFY22E, which is expected to aid them register a healthy profit.

Our View: Notwithstanding the plan for sizeable capacity additions over the next three years, we expect the demand trend to remain favorable, led by a sustained pick-up in infrastructure activities on the back of a sharp increase in government's capex, improving scenario of the real estate market (after more than a decade of lull period) and a revival in industrial capex. We believe the cement industry is in a sweet spot now, as all key consumption drivers are witnessing a healthy traction, which will aid the cement companies to sustain robust earnings growth.

Top Result Picks: UltraTech Cement, Ambuja Cements and JK Cement

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