Construction Materials share price target

As infrastructure spending ramps up, the Indian cement sector is seeing the rise of powerful new players with deep pockets. The recent acquisition of ACC and Ambuja Cements by Adani Group has put the cement industry on notice - this giant family conglomerate is coming after their business. The Adani Group's ambitious plans to double its capacity by FY28 have prompted major cement manufacturers to increase budgets and capex to protect their market share.

We hosted a call with a cement expert (Marketing Director of an unlisted mid-sized cement company) in South India to gauge the demand and pricing outlook in the region. Key takeaways: 1) FY23 demand is estimated to have grown 13-15% with strong momentum seen across all states.

Pricing power is crucial in the commodity business and the Indian cement sector is certainly losing the plot on that front. Elevated competitive intensity across regions, has prevented margin-accretive price hikes, despite: a) robust demand (Q4FY23E prices slipped ~1% QoQ notwithstanding peak season volume surge of ~10% YoY)

Sector outlook and recommendations: We expect the margin to further recover in Q1FY24 onwards, driven by further fuel cost cool-off and rebound in cement prices. Looking at current fuel trends, we believe input cost will cool off by INR 100-150 per MT QoQ in Q1FY24. We trim our industry unitary EBITDA estimates for FY23/24/25E by INR 10-20 per MT each on sub-par cement price increases. We expect the margin to rebound by INR 170/40 per MT YoY in FY24/25E respectively to INR 1,000/1,040 per MT. Hence, we remain positive about the sector. We maintain our BUY ratings on UltraTech, ACC, Dalmia Bharat, Nuvoco Vistas, Birla Corp, JK Lakshmi, and Orient Cements. We maintain ADD ratings on Ambuja Cement, Ramco Cements, Star Cement, Sagar Cements and Deccan Cement. We maintain REDUCE ratings on Shree Cement, Heidelberg Cement and JK Cement. Our top picks are UltraTech Cement, Dalmia Bharat, and JK Lakshmi. We estimate our coverage universe of 15 companies to deliver strong 9/14% YoY/QoQ volume growth (four-year CAGR: 7%) in Q4FY23. We expect strong volume offtake by UltraTech Cement, Dalmia Bharat, Nuvoco Vistas, Birla Corp., JK Lakshmi and Star Cement QoQ. We expect volume decline QoQ by ACC and Ambuja (Himachal plant shutdown). We estimate average industry utilisation of ~86% vs 78/85% QoQ/YoY

Building material companies under our coverage are expected to report a mixed quarter (Q4FY23) YoY: Pipe and ceramic companies to report QoQ improvement in operating margins due to lower raw material cost, whereas woodpanel companies to continue seeing pressure due to higher timber prices.

Cement companies under our coverage may see flat YoY EBITDA during Q3FY23E, however, it could rise by 53% QoQ, led by a) marginal rise in realisation and b) easing of input cost (fuel) pressures. Coverage companies’ unit EBITDA may continue to see weakness as it may fall ~10% YoY (to Rs794) owing to ~9% YoY rise in total costs/te against ~6% rise in realisation.

Cement - Q3FY23 Earnings Preview

Building material companies under our coverage are expected to report a tepid quarter
(Q3FY23) YoY with both revenue and EBIDTA being subdued across segments due to high base. Volume growth across sectors (barring pipe segment) is likely to be tepid YoY/QoQ due to high base and softness in demand as inflationary pressures remained high.