Realty to boost top line growth
The cement sector is expected to record a strong top line performance, led by robust volume growth, partly aided by the year-ago quarter’s low base.
“Led by a strong uptick in urban real estate and infrastructure activity, cement industry volumes have continued to recover. A lower base, due to lockdown in March 2020, is also contributing to higher growth,” Motilal Oswal Securities said in a report.
Demand remained strong in East, North, and Central India, while the West showed signs of revival. South, however, remained weak in Q4, with 10 per cent YOY decline, it said.
This was no surprise as dispatches rose in Q4 to make up for the loss of volumes, said brokerages. However, some regional issues may reflect on companies’ performances.
“Companies with higher presence in the East are expected to deliver weak volume performance due to logistic issues in Chhattisgarh during the end of Q4,” noted Centrum Broking.
Moreover, higher input costs have resulted in a 3 per cent YOY rise in Q4 in average pan-india cement prices.
“With focus on volume, realisation gains were limited. That may relatively soften the Ebitda margins and Ebitda per tonne for companies with focus on the trade segment,” said analysts at Centrum Broking.
The combined effect of softer realisation gains and cost inflation has hit Ebitda with estimates indicating a decline of 6 per cent sequentially and Ebitda margins at 22.3 per cent (24 per cent in Q3) for the sector. Improved operating leverage (higher volumes) should offset cost pressure to some extent. On a YOY basis, however, margins are expected to be higher, as Motilal Oswal Securities estimates companies in its coverage to post 21.7 per cent increase in top line and 34.3 per cent jump in Ebitda.
A strong exit from FY21 could instil confidence of sustainable demand recovery in the current year.
Cost inflation, driven by fuel (imported coal and pet-coke) and logistics (higher diesel prices), however, could weigh on the sector’s performance if prices are not raised.
In Q4, logistics cost inflation was partially offset by busy season surcharge waiver by the railways and, continued discounted freight movement by the mini-rakes.
Among the top players, with renewed buzz on merger with ACC, Edelweiss Research maintains Ambuja Cements as its top pick.
“We estimate Ultratech grey cement consolidated volumes to rise 10 per cent sequentially, implying 22 per cent (YOY) growth on low base. Realisations, however, are expected to slip 1 per cent sequentially and should be up by the same quantum YOY. The blended Ebitda per tonne is estimated to come off 11 per cent [sequentially], and remain flat YOY,” said analysts at Edelweiss.
Volumes of firms with a predominant presence in North India, like JK Cement and Shree Cement, are seen growing at a healthy doubledigit pace sequentially, said Centrum.
Though overall demand outlook for cement remains encouraging going ahead, pricing and cost escalation disappoint, said brokerages.