Cement – Demand for a strong rebound – ICICI Securities

Our channel checks suggest demand in May’21 likely fell into a low double-digit MoM due to localized blockages, with improvement seen in the second half of May’21. On a year-over-year basis, May 21 volumes saw weak double-digit growth, helped by a weak base. Industry operated at around 65% utilization (27 mnte) with exit use on May 21 crossing over 75% and reverting to pre-Covid use, in line with seasonality. With the decline in covid cases and a possible gradual easing of lockdowns, construction activity could gain momentum in June 21 before the monsoon sets in. Pan-Indian average prices on May 21 were up slightly by 1% MoM and 2% YoY and ~ 6% QoQ which would mitigate the impact of various cost increases. We maintain our positive position on the sector, SRCM and UTCEM being our first choices. We also like ACEM, JKCE and TRCL. Main risk: Fall in demand / prices.

– The decline in industry volume is probably limited to a low double-digit MoM at ~ 27mnte in May’21, implying ~ 65% pan-Indian clinker use. On a MoM basis, the West region likely experienced a lower MoM drop than other regions (which likely saw a 10-15% drop in MoM), with demand in Gujarat remaining almost stable in MoM. . Demand in West Bengal to the east and Tamil Nadu to the south has been more affected on the MoM base due to localized blockages after their elections. On an annual basis, the North, Center and East regions are expected to be broadly stable, while growth during May 21 (as well as the first half of fiscal 22) could be driven by the regions of West and South which were severely affected last year due to the pandemic lockdown. Concessionaires suggest that urban infrastructure and demand look better year-on-year, while rural demand holds up year-on-year. With fewer covid cases and a possible gradual easing of lockdowns, construction activity in June 21 could gain momentum ahead of the monsoon and as a result June 21 could see strong volume growth, in our opinion.

– Pan-Indian average prices increased by 1% MoM (2% YoY) in May’21: the southern region and Maharashtra saw a price increase of Rs5-10 / bag MoM, while prices in the Northern, Central and Eastern regions saw a marginal decline of Rs3-5 / bag MoM. On a year-over-year basis, May 21 prices are likely up 2% year-on-year, driven by an around 4% year-on-year increase in the Eastern and Western regions, while the rest of the regions is broadly stable year-on-year.

– Price increases to mitigate the impact of escalating costs for fuel, diesel, slag, etc. and southern regions and 3% increase in QoQ observed in the northern and central regions. With demand likely to improve on June 21, dealers are pointing to the possibility of a seasonal price hike ahead of the monsoon on June 21 in a few areas. Over the past year, the earnings of Consensus FY22-23E have improved and so may as the volume / price improves with decreasing covid cases.

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