Margin curve for cement players anticipated to be on upward trend in Q4FY23E - Cement preview

What's Buzzing 

Underlying cement demand is expected to remain healthy in the medium term (8-9% growth) owing to a boost in government spending on infra projects and upcoming general elections in 2024. The commentary from most companies remains buoyant with capacities operating at 85%+ utilisation levels in Q4FY23. 

Context 

Cement production data was steady in January-February with growth of ~6% YoY but growth in March may have moderated owing to the festive season, labour shortages and unseasonal rains. We expect our coverage universe to register volume growth of 9.3% YoY (12% QoQ) to 66.6 MT in Q4FY23. Companies in mid-February had attempted a price hike of Rs 10-15/bag but the same was fully rolled back in March through higher discounting as players were targeting volume growth. Region wise, prices in north & central are expected to be higher by 2% and 1%, respectively, (on a QoQ basis), whereas southern players are likely to witness a decline of 3% QoQ in Q4FY23. We expect pan-India cement prices to remain flattish QoQ (up 2% YoY). As per channel checks and feedback, cement companies are likely to announce Rs 10-30/bag price hike in April 2023. Acceptance of the same would be a critical factor to watch. 

Our Perspective 

On an average, fuel cost per Kcal is expected to come down from Rs 2.4-2.5/kcal to Rs 2.1-2.0/Kcal over the next two quarters (provided spot prices remain at current levels). With fuel cost witnessing a declining trend, we expect majority of the benefit to flow in from Q1FY24E onwards (as companies have average inventory of three months). For our coverage universe, we expect EBITDA/t to improve by ~Rs 170/t to Rs 948/t in Q4FY23E. We expect UltraTech and Shree Cement to lead the pack with EBITDA/t surpassing Rs 1000/t during this quarter itself supported by healthy volume growth of 14% and 11% YoY, respectively, in Q4FY23E. We expect southern players in our coverage universe (Ramco, Sagar) to witness limited EBITDA/t expansion owing to a higher decline in cement prices in cities like Chennai and Hyderabad during May 2023. We expect the capacity utilisation rate for our coverage universe to increase to 88% (Q3FY23: 80%, Q4FY22: 88%).