Utilization recovers to last year's level: Despite the COVID-induced slowdown, cement demand has recovered to last year’s level in 2Q, leading to flattish utilization YoY at 68%. During Q2, we estimate aggregate sales for 13 cement companies under coverage would have grown 2% YoY, led by volume growth across the north, central and east markets, while the volume decline trend would have continued in south and west markets (albeit at a slower pace). Retail sales have been buoyant and drove total volume growth, despite lower non-trade demand. In the South, project demand has picked up in the past two months, thus moderating regional vol decline in 2QFY21.
Cement prices moderate QoQ partly, remain flattish YoY: Aided by healthy retail demand, cement prices fell only marginally QoQ in 2QFY21. We estimate 2-3% QoQ decline across north/central/west markets. High competitive intensity in east and south markets drove the sharper decline of 5-7% QoQ in these markets (still higher YoY). Subsequently, we estimate the average NSR for our coverage universe to decline 3% QoQ (flat YoY).
The stable realization, lower opex bolster margin YoY: Amid stable realization, average unitary opex for our coverage should fall 2.5% YoY, aided by lower fuel prices YoY and fixed cost controls. Thus, we build in a 10% rise in unitary EBITDA YoY to ~Rs 1,100/MT (one of the best monsoon quarter performances in more than a decade)!
Companies’ performance: We expect our coverage universe to deliver 2/12/39% YoY revenue/EBITDA/APAT growth in 2QFY21E on stable demand and low cost. While we expect EBITDA firm-up (on a high base) for north/central-focused companies, we expect south-focused companies to deliver sharp recovery (on a low base), owing to healthy prices sustaining in 2Q. We expect strong ~25% YoY volume growth for JK Cement (capacity ramp-up), and Deccan Cement (demand rebound in AP/T).
Sector outlook: Cement demand surprised with a sharp recovery in 2Q against a 30% YoY decline in 1QFY21. Healthy monsoon for second consecutive year bodes well for rural markets and retail cement demand outlook. Even infrastructure projects are on a recovery path, which should accelerate non-trade sales in 2HFY21. Cement prices, too, have been stable in 2Q. Thus, we raise volume and realization estimates for our coverage universe, leading to estimates and target price upgrades. We maintain our recommendations and valuation multiples for our coverage universe. Our top picks are – UltraTech Cement Ltd (NS:ULTC), Ambuja Cements (NS:ABUJ) in the large-cap space, and JK Lakshmi Cement Ltd (NS:JKLC), and Birla Corporation Ltd (NS:BRLC) in the mid-cap space.