India Cements Share Price: CLSA Highlights Improving outlook | ACC, Dalmia Bharat and Ultratech top picks

Demand up mid-single digits YoY, EBITDA/t up 32% YoY, India Cements reported a sharp earnings recovery in Q2. Industry demand was up mid single digits YoY, helped by rural recovery. Seventeen listed companies that CLSA tracks indicated a 6% YoY volume increase and 32% YoY profitability increase (down 2% QoQ). The demand outlook remains robust, with other pillars (infra and urban) picking up as rural demand normalises. Cost pressures (mainly power/fuel and freight) are rising but are likely to be partly offset by resilient prices. For FY21 CLSA expects a 7% YoY volume decline and a 14% YoY EBITDA/t increase for their coverage. ACC, Dalmia Bharat and Ultratech Cement are their top sector picks in cement space.

Demand growth backed by rural in first half of FY21; infra and urban picking up now:

Demand recovered meaningfully from the lockdown hit lows of Q1, with industry growth of mid-single digits YoY. Demand was strong in North, Central and East India. The West was largely subdued while trends were mixed in the South. In terms of segments, rural was the key demand driver, with infra and urban housing mixed and commercial weak. Demand commentary was constructive from most companies, with infrastructure and urban housing starting to pick up. Regionally, demand in the West rebounded during the past two months and government projects have picked up in Andhra Pradesh/ Telangana. Labour availability has largely returned to normal. Several companies indicated 20% or higher YoY growth in rural demand. Assuming this, the rest of the demand drivers have either remained flat or declined slightly YoY.

Prices fall in line with seasonality; resilient otherwise:

Blended realisation for the 17 tracked companies fell 3% QoQ, which is usual for a seasonally weak monsoon quarter. q Prices were most resilient in North and Central India but were weak in the East. South India prices were relatively resilient. q Our channel checks show prices hardening across regions in October, indicating better realisation in 3Q. Prices in most regions are up Rs5-15/bag from September. However, realisations could dilute as the proportion of non-trade (institutional) sales picks up (with higher infra sales). q With cost pressures rising, most companies expect prices to be resilient.

Cost controls remain in focus:

Cash cost/t for the listed companies fell 7% YoY (down 1% QoQ) mainly on better operating efficiencies as volumes picked up. Freight costs were higher for most companies as diesel costs inched up this quarter. Most companies indicated upside risks to costs on higher power/fuel costs (petcoke) and an increase in discretionary spending (advertising/travel). Overall EBITDA/t for the 17 companies were up 32% YoY (down 2% QoQ).

Near-term outlook robust; consensus estimates up 25/14% since June:

CLSA expects a 7% YoY industry volume decline in FY21 followed by a 10% rise in FY22. As other demand pillars pick up and other regions start contributing, CLSA expects demand to remain resilient. Moreover, we are entering into a seasonally strong construction period. CLSA expects FY21 EBITDA/t to rise 14% YoY for covered companies as prices rise and efficiencies offset cost headwinds.

Consensus revision:

Since June, consensus EBITDA for cement companies under coverage has increased 25/14% for FY21/22 as earnings surprised positively in both FY21 quarters so far.

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Top picks:

CLSA remains positive on the sector outlook. ACC, Dalmia Bharat and Ultratech Cement remain our top picks.