Cement - Demand improves in Sep'20; prices to follow soon - ICICI Securities

Our channel checks suggest the cement industry may post positive volume growth in Sep'20 after six consecutive months of YoY decline, led by sharp demand uptick in East and aided by YoY favourable base of South. Aug'20 volumes likely declined by mid-single digit YoY - broadly similar to those seen during Jun-Jul'20. Average pan-India prices were up 2% YoY in Aug'20 even as prices fell 3-4% MoM across most regions coupled with higher fall of Rs25-30/bag in the non-trade segment. Improving demand and increasing costs would necessitate price increase going ahead. We expect volumes and prices to improve hereon. Recent underperformance of cement stocks during the seasonally weak monsoon period is an opportunity to accumulate, in our view. SRCM and UTCEM remain our top picks. We also like ACEM and JKCE.

- Industry volumes likely down ~5% YoY to ~23mnte during Aug'20 (our estimate) with pan-India utilisation at ~60%. Volumes in North, Central and East (least impacted by Covid) likely grew in mid-single digit YoY while volumes are still meaningfully down YoY in both West and South. Though volumes were sharply impacted in the first half of Aug'20 owing to heavy monsoon, the second half saw improvement with rains subsiding. Non-trade volumes picked up as prices corrected by a sharp Rs25-30/bag.

- Industry may post positive volume growth in Sep'20 after six consecutive months of YoY decline. This would be led by sharp demand uptick in East (pre-election spending in Bihar, West Bengal, rehab work in Odisha, strong rural / semi-urban housing demand) and better demand in Central region. Pent-up urban demand and non-trade demand, especially in South and West, are likely to improve going ahead with gradual return of migrant workers. We continue to factor low single-digit decline in industry volumes for FY21E vs consensus view of at least low double-digit decline.

- Average pan-India prices were up ~2% YoY during Aug'20 led by ~9% YoY price increase in South. Prices were up 2% YoY in North, broadly flat YoY in West and likely down 3-4% YoY in East and Central regions during Aug'20. We believe effective clinker utilisation is unlikely to see any meaningful decline over FY20-FY22E as most planned capacity expansion may get delayed / deferred resulting in firm prices and better margins.

- Domestic petcoke and diesel prices are sharply up by 17% and 14% QoQ and up 5% and 15% YoY respectively. Yet, overall cost increases are likely to be contained given strict cost controls with structural fixed-cost rationalisation, improving efficiencies and better operating leverage. Improving demand and increasing costs would necessitate price increase going ahead, in our view.

Source : Equity Bulls

Keywords