Cement volume growth strong in 4QFY24, Motilal Oswal report

Hyderabad: According to the Motilal Oswal (MOFSL) report, India is projected to end FY24 with a GDP of $3.6 trillion and a growth rate of 7.6% or higher. The capital markets also saw significant growth, with Nifty, Nifty Midcap 100, and Nifty Smallcap 100 showing returns of 29%, 60%, and 70% respectively. India's market capitalization has reached $4.4 trillion, making it the world's fifth-largest. From FY20 to FY24, Nifty and MOFSL Universe's profit pool grew from Rs 3.5 trillion to Rs 7.7 trillion and Rs 4.3 trillion to Rs 11 trillion in FY24, respectively, representing a solid compound growth of 22% and 27%.

Domestic retail savers in India have increased their participation in capital markets, with Demat accounts rising to 151 million in Mar’24 from 36 million in Mar’19. Over the last five years, cumulative domestic equity inflows reached $92.7 billion, while India Inc. raised $92.9 billion through primary markets. India now combines 'size and growth,' with expectations of its GDP surpassing $4 trillion in FY25/26 and $8 trillion by FY34. Political continuity post the Lok Sabha Elections’24 is expected to further boost economic momentum, especially focusing on infrastructure, capital expenditure, and manufacturing. With India's capital markets set for growth, they are poised for a promising future.

Cement:

• It is estimated there is likely to be a volume growth of approximately 10% year-on-year for the covered companies in the fourth quarter of FY24.

• The coverage universe is expected to report robust volume growth of 10% YoY, with an average capacity utilization of around 93%, compared to 91% and 79% in 4QFY23/3QFY24. However, cement prices declined across regions in the fourth quarter, with the all-India average price down by about 7% (a decrease of Rs25 per 50-kg bag) QoQ. The blended realization for the coverage universe is estimated to decrease by approximately 3% to 4% YoY/QoQ.

• Due to the significant price correction in 4QFY24, the average EBITDA/t is expected to decline by about 12% QoQ to RS990, partly offset by positive operating leverage and favorable fuel prices. Aggregate EBITDA is estimated to increase by 24% YoY, with OPM expected to improve by 2.6 percentage points YoY to 18.2%.

• GRASIM’s revenue is estimated to decline by 3% YoY. VSF volume is expected to increase by 5% YoY, while realization is estimated to decline by 6% YoY (up approximately 1% QoQ). The chemical segment volume is estimated to increase by 6% YoY, with a potential realization decline of 20% YoY. The company’s EBITDA is expected to increase by 20% YoY, with EBITDA margin improving by 1.6 percentage points YoY to 8%. Adjusted PAT is estimated to grow by 80% YoY.

Despite strong volume growth, a decline in pricing has led to a reduction in EBITDA/t QoQ

• Following moderate growth in 3QFY24, cement volumes experienced a significant surge in 4QFY24, driven by robust demand from real estate, infrastructure , and a pickup in private capex. It is estimated that there could be approximately 15% YoY volume growth for JKCE, followed by around 11-12% for ACC, ACEM, BCORP, DALBHARA, and UTCEM, and about 7-8% for SRCM, TRCL, and JKLC, while ICEM’s volume is estimated to remain stable.

• However, cement prices corrected across regions in 4QFY24. The Eastern and Southern regions witnessed the highest decline of around 8-9% QoQ, followed by the Northern and Western regions with a decrease of about 7%, and Central India with a drop of approximately 3%. The blended realization for the coverage universe is estimated to decline by about 3% to 4% YoY/QoQ.

• The average Opex/t for the coverage universe is estimated to decline by 6% YoY (down 3% QoQ), supported by a reduction in input material costs. The average variable cost/t is estimated to decline by Rs314/t YoY (a decrease of Rs67/t QoQ).

• ACC and JKCE are estimated to report strong YoY EBITDA growth at approximately 74-75%. EBITDA is expected to grow by 45% YoY for BCORP, 27-28% YoY for JKLC and SRCM, and 13-18% for ACEM, DALBHARA, and UTCEM. EBITDA is likely to decline by 3% YoY for TRCL. ICEM is expected to report EBITDA of RS475 million compared to an operating loss of RS445 million in 4QFY23.

• It is likely that EBITDA/t of Rs1,218 for SRCM, followed by Rs1,133 for JKCE and Rs1,069/Rs1,038 for UTCEM/ ACEM. EBITDA/t is estimated to range from Rs790-970 for ACC, BCORP, DALBHARA, JKLC, and TRCL, with Rs171 for ICEM.

Reduced earnings estimates due to significant price correction

• Despite high capacity utilization (over 90%) during the quarter, cement prices corrected sharply across regions. This has resulted in lower profitability in 4Q and poses a risk to FY25/FY26 earnings estimates.

• Demand in 1HFY25 is expected to be moderate due to general elections until the end of May’24, followed by the monsoon season. Additionally, ongoing capacity expansions by leading industry players and the ramping up of acquired assets are likely to keep the prices in check.

• Considering the lower exit prices of Mar’24 and increased competitive intensity, it is not likely that there could be a sustainable price hike in the near term. As a result, the company has reduced its aggregate EBITDA estimate by 3.7%/3.5% (including recent earnings cuts for DALBHARA and SRCM in its company update notes) for FY25/FY26. This has led to a 3.8%/5.0% reduction in aggregate profit for companies in its cement universe for FY25/FY26.

Earnings sensitivity remains high to price changes

• It is estimated that cement demand is likely to grow at a CAGR of around 7% over FY24-26, surpassing the company’s estimate for clinker capacity additions (approximately 6% CAGR over FY24-26). The industry’s clinker utilization increased to around 79% in FY24 compared to approximately 76% in FY23. The company estimates clinker utilization to further increase to 80%/81% in FY25/FY26.

• Fuel prices have remained stable in recent months, but earnings sensitivity remains high due to pricing behaviors within the industry. Key risks to our estimates include substantial sustainable price hikes by industry players to protect margins in an expected low-demand environment until 1HFY25 and potential increases in fuel prices.

• The company continues to favour UTCEM in the large-cap space and DALBHARA and JKCE in the mid-cap space. These companies have shown resilience and strong performance in the cement sector.

In summary, the Indian economy is on a growth trajectory, with a projected GDP of $3.6 trillion for FY24, and the capital markets have seen significant expansion. Cement companies, while experiencing strong volume growth, faced challenges with declining prices in the fourth quarter of FY24. Despite this, companies like ACC, JKCE, BCORP, and others are expected to report positive EBITDA growth.

Looking ahead, uncertainties remain, particularly about cement prices and demand in the first half of FY25 due to the general elections and subsequent monsoon season. It is anticipated there could be a moderate demand growth of around 7% for cement over FY24-26, slightly higher than clinker capacity additions.

Given these factors, the company has adjusted its earnings estimates for FY25/FY26 to account for the sharp price corrections. Their outlook suggests that the cement industry's earnings will continue to be sensitive to changes in prices and demand.

Despite these challenges, they maintain a preference for UTCEM in the large-cap segment and DALBHARA and JKCE in the mid-cap segment, based on their performance and resilience within the cement sector.

In conclusion, while the Indian economy and capital markets show promise, the cement sector faces short-term challenges. Companies will need to navigate these challenges with strategic planning and operational efficiency to maintain growth and profitability in the coming years.