Pan-India average cement price increased by ~2% MoM in October 2022 led by 2-5% price increase in South, East and West markets. Cement prices increased Rs 5-20/bag MoM (2-5%) in South/East/West India, while remaining flat in North and Central India in October 2022.
The highest increase was seen in South India (~5% MoM) followed by West (3% MoM) and East (2% MoM) in October 2022.
In the first week of November 2022, cement players announced price hikes of Rs 5- 10/bag across regions. As per our channel checks, cement players are planning to implement another price hike of Rs 10/bag across regions.
We believe that the decline in coal/petcoke prices should help average cost reduction of at least Rs 150/t in 3QFY23. Imported coal price after remaining at an elevated level of USD 250-350/t (Richard Bay Spot prices) over March 2022-October 2022 has declined by 19% in the last month.
Though Petcoke prices have increased from mid-October 2022, it remains 29% lower than 1QFY23 average price. Average spreads should improve ~Rs 300/t for the industry in 3QFY23E; benefitting from a reduction in power and fuel costs and improvement in realisation.
Cement demand was subdued in October 2022 due to the early festive season and is estimated to decline ~7-8% YoY and ~3-4% MoM.
However, we expect the demand to revive in the coming months with improvement in labour availability, rural demand, government’s thrust on infrastructure (aided by pre-election government spending) and steady demand from the housing segment.
We are positive on the cement industry dynamics for the next few years due to 1) better demand prospects led by infrastructure and housing sector, 2) increased consolidation in the industry and 3) regulatory changes in the allotment of limestone blocks.
Our demand CAGR estimate of ~8% over the next three years is likely to surpass the installed capacity CAGR of 5.5%. We estimate cement demand to grow at ~10%/9% YoY in FY23/24; demand is estimated to grow at ~6-7% in 2HFY23.
We prefer regions with favorable demand-supply situations and better pricing power such as north India, Gujarat, and central markets.
: Buy| LTP Rs 3,014 | Target: Rs 3,370 | Upside 12%
JK Cement plans to expand its presence in central India by setting up an integrated plant at Madhya Pradesh and a split grinding unit in Uttar Pradesh.
The company is increasing its grey cement capacity by 27% to 18.7 mtpa by FY23-end, driving a CAGR of 11% in grey cement volume over FY22-25E.
It further intends to increase its grey cement capacity to 25mtpa by FY25E. Over FY22-25E, we expect a 12% EBITDA CAGR. Improvement in grey cement profitability will be driven by cost-saving initiatives and improvement in realisation with increasing exposure in north and central India.
: Buy | LTP Rs 1,742 | Target Rs 2,000 | Upside 15%
Cement demand is expected to be strong, driven by a revival in housing and the government’s thrust on infrastructure. It aims to grow at 1.5x of the industry volume growth.
Dalmia Bharat is confident it to reach at 49 mtpa capacity by FY24E and has set a target to reach 70-75 mtpa capacity by FY27. Renewable power share is likely to increase to 35% by FY25 from 24% at present.
We expect the stock to trade at higher multiples, given the growth plans without leveraging the balance sheet and cost-reduction initiatives.
(Disclaimer: The author is Head – Retail Research, . Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)