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Coronavirus impact: Shadow of disruption looms large on cement sector; volumes to deteriorate

Fluctuation in prices and pressure on margins are likely to hit the sector, as cement companies will attempt to gain market share after normalcy returns.

April 05, 2020 / 08:16 AM IST

Most cement stocks have suffered significant losses in the wake of the novel coronavirus pandemic, and brokerages and industry experts are expecting rough weather ahead for them owing to disruption in economic activities.

Brokerages have highlighted that the demand for cement in FY21 is likely to be impacted by the lockdown announcement and the expectations of lower infrastructure spending by the central and state governments as their finances may be under strain due to relief packages to support the loss of income caused by the lockdown.

"We factor in the industry’s average capacity utilization of a mere 46 percent in Q1FY21 and 56 percent in Q2FY21. We factor in a volume decline of 34 percent YoY in Q1FY21 and assume a volume decline of 10 percent YoY in Q2 and Q3FY21. However, Q4FY21 may see a volume growth of 5 percent YoY (supported by a lower base of Q4FY20)," said Emkay Global Financial Services in a report.

Emkay expects 2 percent and 12.4 percent YoY volume decline for the industry in FY20E and FY21E, respectively. However, the brokerage expects the industry volumes to recover sharply in FY22E, supported by a low base of Q1FY22E and factors in a 13 percent YoY volume growth for the year.

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The decline in volume is also a blow to the hopes of recovery in utilisation. The utilisation of the industry is expected to come under significant pressure over the next two years.

"We believe that the clinker utilization rate will be at 69.8 percent in FY22E (almost equal to FY14 levels), while grinding capacity utilization may fall to 59.8 percent in FY22E. We expect announcement of fresh capacity additions to slow down as we believe that capacity utilization will remain lower than the levels seen in the last few years," Emkay said.

Brokerage firm Motilal Oswal Financial Services expects cement sector utilisation to improve structurally over the next three years given limited capacity addition at nearly 4 percent CAGR. Motilal expects demand CAGR to sustain at 6 percent — in line with past five years.

Fluctuation in prices and pressure on margins are also likely to hit the sector as cement companies will attempt to gain market share after normalcy returns.

"We believe that the behavior of cement manufacturers will be an important factor for pricing movement across regions as efforts to gain market share or push higher volumes could lead to significant pricing volatility and pressure on margins," Emkay said.

On the other hand, Motilal believes that the north and central India markets are best placed structurally as they have achieved a high level of consolidation with utilization at nearly 85 percent already. As per Motilal, prices in these regions should continue to fare better.

At this juncture, brokerages are betting on the stocks from the sector which are strong on books and provide comfort on the front of valuation.

"We prefer companies that have an ability to gain market share, are moving down the cost curve and provide valuation comfort. Therefore, UltraTech is our top large-cap and JK Cement our top mid-cap pick. We also like ACC as a value pick," Motilal Oswal said.

On the front of earnings, most brokerages have trimmed their earnings expectations from the sector for FY21. The March quarter numbers of FY20 may have some positives.

"We expect cement companies under our coverage to report average EBITDA margin of 21.2 percent in the quarter ended March 2020 versus nearly 19.2 percent in the quarter ended March 2019," said brokerage firm Centrum Broking.

Centrum said the March quarter was a mixed bag as prices moderated in the southern region while in the northern region prices stayed elevated YoY. Weakness in organised housing demand a major contributor to the cement demand continued however, the individual house builders demand continued. The traditional year-end completion rush from the infrastructure segment was absent in this quarter.

However, Centrum underscored that the volume in the last month of the quarter (March 2020) was impacted severely due to the country-wide lockdown announced by the Centre.

"Effectively our estimates indicate 10 percent YoY fall in volumes of our coverage companies. Despite the volume decline the YoY performance still remained optically healthy due to the sharp spike in prices in the Q4FY19/H1FY20 except for southern companies," Centrum said.

Centrum feels the sharp spike in realisation in Q4FY19 (base quarter) continues to help its coverage companies in North and Central India to maintain EBITDA/tonne.

However, the higher base will impact the earnings of these companies in FY21. Centrum expects muted earnings in FY21 though the impact in FY22 is expected to be less severe.

"The FY21 earnings estimates will be impacted severely. We factor in a gradual and slow recovery unlike a ‘V’ shaped recovery in the performance even after normalcy resumes once the threat of COVID-19 recedes," Centrum said.

"Our top picks continue to be Ultratech Cement and Ramco Cements. We are also positive on Ambuja Cements given the attractive valuations. We have revised our ratings assigned to ACC and J K Cement from 'reduce' to 'add' following our first impression analysis due to the valuations of these companies following the correction in the stock prices," Centrum said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Apr 5, 2020 08:16 am

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