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Infra, real estate to keep cement demand healthy in 2021

The eastern market may come under severe pressure as the total capacity of around 8 MTPA is expected to be commissioned in 2021.

December 30, 2020 / 11:56 AM IST
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How the sector performed in 2020?

For the cement sector,  2020 was a remarkable year. With imposition of lockdown in March, the initial expectation was an industry de-growth of 15-20 percent YoY for FY21. However, a buoyant demand scenario in the rural and individual house builder (IHB) segment combined with the support from off-take in the government infrastructure projects provided a fillip to the industry, with the current revised expectation of flattish growth for FY21.

Among regions, eastern and central markets spearheaded the demand growth for the industry followed by north. The demand scenario in the south and west remained soft as these regions were hit hard hit by COVID-19 spread.

On the pricing side, cement prices post relaxation of lockdown have maintained a sturdy trajectory, with the southern region optically witnessing the sharpest increase (primarily by low base). On the costs front, though there was a sharp surge in diesel prices, pet-coke consumption cost remained soft for the most part of the year before increasing from Q4CY20 onwards. Cumulatively, these factors led to lifetime high profitability and lifetime high quarterly EBITDA for the majority of cement companies during Q2-Q3CY20.

Which stocks performed/underperformed in 2020?

Led by 4 MTPA capex commissioning of JK Cement, it clearly outperformed in the cement pack followed by other midcap stocks like India Cements, Ramco Cement and Birla Corporation.

Expectations from 2021?

We expect the demand scenario to remain healthy with a higher contribution from infrastructure and real estate segment in 2021. Among regions, we expect the eastern market to continue to outperform followed by the west and south (low base) and sustainable demand scenario in northern and central markets. We expect profitability for the sector to have peaked in Q3CY20 as the industry may witness pricing pressure and the pinch of higher input costs from 2021. We expect pricing in the east to be under severe pressure as the total capacity of around 8 MTPA is expected to be commissioned in 2021. Further, we estimate pricing discipline to be perturbed in the south.

Which stock(s) will do well in 2021?

We expect stocks like Birla Corporation in midcaps to outperform as it commissions around 4 MTPA greenfield capacity in 2021, while we prefer UltraTech Cement in largecaps post its recent capex announcement.

(Kunal Shah is the Analyst-Institutional Equities at Yes Securities.)

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Kunal Shah
Kunal Shah