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3QFY20 REVIEW 28 FEB 2020
Cement
3QFY20 Review – Pricing and cost tailwinds to continueIn this report, we deep dive into operating performance of 19 listed cement companies to compile industry trends. These companies comprise ~75% of the Indian cement industry and hence largely reflect the industry trend. Our analysis suggests that despite subdued demand in the past three qtrs, industry’s operating margin has scaled up to decade high. This is driven by strong pricing in the north/central/Gujarat markets, steady fall in pet-coke prices and low diesel prices. Cement prices have increased QoQ in 4QFY20, aided by demand recovery. Further, as fuel prices continue to fall and diesel price remains stable, margin tailwinds appear sustainable for the industry. In our view, cement companies with large sales exposure to north/central/Gujarat markets should gain the most.
Subdued demand across India moderated NSR gains: During 3QFY20, cement demand remained flat YoY (for the 3rd consecutive qtr) owing to a high base and demand slow down. This also pulled down utilisations YoY. Amid weak demand, the YoY NSR growth intensity moderated in 3Q (from 10% in 1QFY20 to 3% in 3Q).
Divergent pricing trends: Strong utilisation in the north/central markets (NCG) has kept cement prices robust in these mkts vs those in the south/east/Maha markets (SEM). During 3Q, while cement prices in NCG markets were up 8% YoY, it declined 5% YoY in SEM markets! Even during 9MFY20, prices in the NCG region rose 10% YoY vs a modest 1% rise in SEM region. In our view, demand contraction in the southern region in FY20 and heightened competition in the eastern region has been driving this sharp divergence in realization trends.
Opex decline continued in 3Q on falling energy costs: The cement industry is also benefitting from continued
fall in petcoke and diesel prices during 2019. This has reduced input and freight costs for the industry. Thus, despite slight rise in unitary fixed costs (on lower utilisation), unitary opex fell YoY, boosting margins.
Industry’s margin at decade high; NCG outpaced SEM in 2019: As the industry continues to benefit from both higher realizations and opex moderation, industry’s op margin has firmed up to its decade high (TTM basis) of ~Rs 1,000/MT. Interestingly, in 2019, NCG exposed companies’ avg op margin surged ahead of SEM cos’ margin by ~Rs 200/MT as compared to historical declining trend (During FY11-19, NCG’s op margin lagged SEM’s by ~Rs 160/MT on an avg).
Demand recovery to keep realization buoyant: Cement demand has been improving QoQ in 4QFY20, thereby supporting cement prices rise over the past two months. Again, the pricing gain remains stronger in the NCG region owing to high regional utilisation. In the SEM region, pricing recovery will remain volatile on account of low regional utilisation and aggressive competition. Hence, demand uptick is going to be a key driver for stable pricing in the region. As per our recent channel checks, we estimate avg cement prices in NCG to rise 3% YoY in 4QFY20. However, despite price recovery in the SEM region QoQ, we estimate cement prices to be 4% lower YoY.
Cost tailwinds also continue: Petcoke prices continue to decline in 2HFY20. Even imported thermal coal prices remain lower YoY, despite recovery in past two quarters. Thus, we expect industry’s input costs will further cool of in FY21E, and keep industry’s margin buoyant.
Rajesh Ravi [email protected] +91-22-6171-7352
Saurabh Dugar [email protected] +91-22-6171-7353
HDFC securities Institutional Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters
CEMENT : 3QFY20 REVIEW
Contents 3QFY20 – Healthy realization amid subdued demand growth ...................................................................... 3
Regional Disparity in cement prices – NCG markets outperforming SEM markets .......................................... 4
Industry’s opex trends – Falling fuel and diesel prices tailwinds continue ..................................................... 5
Industry’s margin trends – Margins continue to firm up ................................................................................ 6
Coverage companies’ performance in 3QFY20 ............................................................................................. 7
Realisation and cost outlook – Tailwinds to continue in 4QFY20/1HFY21 ...................................................... 9
Page | 2
CEMENT : 3QFY20 REVIEW
3QFY20 – Healthy realization amid subdued demand growth Cement demand remained flattish for the third qtr in a row in 3QFY20…
… thereby subduing industry utilisation in the past 3-qtrs
Source: Bloomberg, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research However, NSR continued to rise YoY in 3Q, albeit at slower pace compared to 1HFY20
NCR (NSR ex-freight) has also been strong during past 3-qtrs; CY19 NCR at multiyear high!
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research
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We have compiled the performances of 19 listed cement companies to analyse industry trends. These companies together account for ~75% of total cement sales in India and are fairly distributed across India. For long term realisation trend analysis, NCR (ex - freight NSR) is a better metric as it evens out the impact of lead distance changes, variation in trade/non trade mix and FOR/ ex-FOR sales. During 9MFY20, the industry’s NCR has increased 9% YoY
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CEMENT : 3QFY20 REVIEW
Regional Disparity in cement prices – NCG markets outperforming SEM markets Cos in NCG mkts are steadily reporting higher NSR rise vs cos in SEM mkts
Even the annual trends for past 5-yr suggests NCG mkts has better pricing power vs SEM
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research Better realization in NCG mkts has yielded in stronger EBITDA margin in past 3-qtrs
NCG cos’ annual margins have now outpaced SEM cos’ margin
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research
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For this regional pricing disparity analysis, we have segregated the 19 cement cos in three groups: Pan India, North, Central & Gujarat (NCG), and South, East & Maharashtra (SEM)
As Gujarat market is impacted by demand/supply dynamics of North/Central markets, we have clubbed them together under NCG
Similarly, Maharashtra and east regions are impacted by demand dynamics of south. Thus, we club them under SEM
Pan India sales – UltraTech, ACC and Ambuja
NCG: In this group, we have kept 8 cos which have large sales exposure to these markets – Shree Cement, JK Cement, JK Lakshmi, Birla Corp, Prism, Heidelberg, Mangalam, and Sanghi Ind.
SEM: In this group, we have kept 8 cos which have large sales exposure to these markets – Dalmia Bharat, Ramco Cem, India Cem, Orient Cem, Star Cem, Sagar Cem, Deccan Cem, and NCL Ind.
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Page | 4
CEMENT : 3QFY20 REVIEW
Industry’s opex trends – Falling fuel and diesel prices tailwinds continue Falling fuel prices led to a fall in input costs during 2Q/3QFY20, thus steadily reducing inflation trend
Similarly, freight cost decline continued in 3Q, mainly led by lower diesel prices YoY
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research However, lower utilisation has kept unitary fixed cost inflated in the past 3-qtrs
Overall opex inflation has been steadily moderating over the past three years
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research
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Page | 5
CEMENT : 3QFY20 REVIEW
Industry’s margin trends – Margins continue to firm up Healthy pricing & cost moderation has firmed up margin YoY in 3Q, despite cool off from 1Q levels
The industry’s EBITDA margin in FY20E is at its highest in past 10 years!
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research Similarly, industry’s OPM has firmed up to multi-year high
NPM is still away from its recent peak owing to lower utilisation and hence higher capital charges
Source: Company, HDFC Sec Inst Research Source: Company, HDFC Sec Inst Research
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CEMENT : 3QFY20 REVIEW
Coverage companies’ op performance trends in 3QFY20 Our coverage universe companies reported 2%/2%
vol/NSR growth YoY in 3QFY20. Further even opex declined 2% YoY. Thus, unitary EBITDA for our coverage universe firmed up 23% YoY to Rs 920/MT.
In-line the regional analysis discussed earlier, the margin expansion has been the highest for companies with sales concentration in the NCG markets, while margins weakened YoY for SEM focused companies.
Even on QoQ basis, the SEM focused companies reported larger fall in their op margin in comparison to the NCG focused companies.
Among the pan India companies, UltraTech delivered strong margin recovery owing to its cost stabilization for its recent acquisition – Binani Cement.
Shree Cement delivered the highest op margin in the industry on strong cost controls and on benefits of robust pricing in the NCG markets.
The AP/T based companies were the worst hit as sharp demand contraction hit them on utilisation (and hence op lev) as well as on pull back in realization (on weak demand).
While fuel cost for the cement industry in general has been falling, North-east (NE) based Star Cement is witnessing inflationary trend as it has to source petcoke/coal from outside NE region in 2019 (temporary scarcity of local coal supply in Meghalaya). Thus, it was hit on both weak pricing and elevated fuel costs.
Operational Summary – 3QFY20
Sales Volume (mn MT) NSR (Rs/MT) EBITDA (Rs/MT) Opex (Rs/MT)
Dec-19 YoY (%) QoQ (%) Dec-19 YoY (%) QoQ (%) Dec-19 YoY (%) QoQ (%) Dec-19 YoY (%) QoQ (%) Pan India UltraTech 20.9 (4.0) 11.8 4,954 3.2 (3.8) 1,008 37.5 (1.8) 3,946 (3.0) (4.3) ACC 7.8 3.9 20.5 4,774 (0.4) (4.9) 603 (4.2) (28.5) 4,171 0.1 (0.1) Ambuja Cem 6.5 6.7 25.0 4,795 2.7 (4.5) 837 27.0 (0.5) 3,958 (1.4) (5.3) NCG focused Shree Cem 6.2 5.3 9.1 4,512 4.6 (3.0) 1,365 28.1 (5.9) 3,146 (3.2) (1.7) JK Cem** 2.6 2.4 14.3 5,490 7.7 (2.1) 1,086 28.8 (4.4) 4,404 3.5 (1.5) JK Lakshmi 2.3 1.0 13.0 4,319 6.5 (4.9) 653 53.1 (9.5) 3,666 1.0 (4.0) SEM focused Dalmia Bharat 5.1 14.1 14.1 4,741 (2.4) (5.2) 896 3.2 (15.7) 3,845 (3.7) (2.4) Ramco Cem 2.8 3.5 4.4 4,487 1.9 (5.0) 726 (8.7) (26.7) 3,762 4.3 0.8 Orient Cem 1.5 (2.0) 19.2 3,817 0.9 (8.0) 372 47.8 (14.0) 3,445 (2.4) (7.3) Deccan Cem 0.3 (33.5) (9.5) 3,594 0.5 (4.7) 328 (30.6) (27.0) 3,266 5.2 (1.7) Star Cem 0.8 15.0 24.7 5,718 (6.2) (4.9) 1,250 (33.0) 17.1 4,468 5.6 (9.7) Total 56.8 1.6 14.2 4,791 2.4 (4.1) 920 22.6 (8.7) 3,871 (1.5) (2.9) Source: Company, HDFC Sec Inst Research, ** Blended performance for grey and white/putty segments
Dalmia stood out as it delivered robust 14% YoY vol growth
Shree Cement posted the highest unitary EBITDA in the industry
Star Cement witnessed both NSR decline and cost inflation YoY
Page | 7
CEMENT : 3QFY20 REVIEW
Coverage companies – 3QFY20 financial performance Aided by better realization and lower costs, amid
subdued volume off take, the aggregate EBITDA of our coverage universe rose 23% YoY.
The growth is led by robust uptick for NCG focused companies and on strong recovery in UltraTech’s profitability.
Weak demand (across south) and pricing (across SEM markets drove weak earnings for SEM based companies.
Financial Summary – 3QFY20
(Rs mn) Net Sales (Rs mn) EBITDA (Rs mn) EBITDA Margin (%) Adj. PAT (Rs mn)
Dec-19 YoY (%) QoQ (%) Dec-19 YoY (%) QoQ (%) Dec-19 YoY (pp) QoQ (pp) Dec-19 YoY (%) QoQ (%) Pan India UltraTech 103,538 (0.9) 7.6 21,062 32.1 9.8 20.3 5.1 0.4 8,025 102.4 38.6 ACC 40,603 4.2 15.1 5,410 5.9 (2.9) 13.3 0.2 (2.5) 2,733 7.3 (9.7) Ambuja Cem 31,359 9.5 19.4 5,474 35.5 24.5 17.5 3.4 0.7 3,327 28.2 41.8 NCG focused Shree Cem 28,483 2.4 1.7 8,493 23.1 0.6 29.8 5.0 (0.3) 3,100 10.2 0.3 JK Cem 14,042 10.3 12.0 2,777 31.9 9.3 19.8 3.2 (0.5) 1,376 125.8 26.4 JK Lakshmi 10,050 7.5 7.4 1,519 54.6 2.2 15.1 4.6 (0.8) 492 233.4 7.1 SEM focused Dalmia Bharat 24,180 11.3 8.1 4,570 17.8 (3.8) 18.9 1.0 (2.3) 240 (33.4) (11.1) Ramco Cem 12,780 5.6 (2.9) 2,029 (5.2) (31.3) 15.9 (1.8) (6.5) 948 (6.2) (43.6) Orient Cem 5,645 (1.1) 9.6 550 44.9 2.5 9.7 3.1 (0.7) (57) Deccan Cem 1,158 (33.1) (13.8) 106 (53.8) (34.0) 9.1 (4.1) (2.8) 39 (65.7) (57.9) Star Cem 4,512 8.3 18.0 940 (22.9) 46.0 20.8 (8.4) 4.0 712 (13.5) 59.6 Total 276,349 3.4 9.0 52,930 23.3 4.5 19.2 3.1 (0.8) 20,934 41.0 14.9 Source: Company, HDFC Sec Inst Research
Page | 8
CEMENT : 3QFY20 REVIEW
Realisation and cost outlook – tailwinds to continue in 4QFY20/1HFY21 Cement prices in the NCG continues to firm up -+9/3% YoY/QoQ in 4QFY20
Cement prices in SEM remains volatile: Despite 3% QoQ recovery, it is down 4% YoY
Source: HDFC Sec Inst Research Source: HDFC Sec Inst Research Crude price continue to fall: Down 4/3% YoY/QoQ in 4QFY20...
... thus, leading to Diesel prices 1% YoY fall (flat QoQ) in 4QFY20
Source: Bloomberg, HDFC Sec Inst Research Source: Bloomberg, HDFC Sec Inst Research
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Petcoke (an imported kiln fuel for the cement industry) has been steadily declining.
These imply that the benefits from lower fuel and freight costs will continue in FY21E
Page | 9
CEMENT : 3QFY20 REVIEW
Petcoke prices continue to fall; mixed trends for imported thermal coal Imported petcoke prices continues to fall - down 30/4% YoY/QoQ in 4Q (at 3.5 yr low levels)
Domestic petcoke price has seen marginal recovery in Feb’20; however is still down 28/1% YoY/QoQ
Source: Industry, HDFC Sec Inst Research Source: Industry, HDFC Sec Inst Research S/African coal prices has been recovering during FY20; Still it is down 1% YoY (+14% QoQ) in 4Q
Indonesian coal prices however continue to drift lower – Down 10/0% YoY/QoQ in 4Q
Source: Industry, HDFC Sec Inst Research Source: Industry, HDFC Sec Inst Research
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Petcoke prices are down to almost 3-4 year low levels! Thermal coal mixed trends: South African coal prices have been rising in FY20 while Indonesian coal fall continues
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CEMENT : 3QFY20 REVIEW
Peer Set Comparison
Company Mcap (Rs bn)
CMP (Rs/sh) Reco
EV/EBITDA (x) EV/MT (USD) Net D:E (x) RoE (%)
FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E UltraTech Cement 1,187 4,331 BUY 14.1 12.5 11.2 190 181 168 0.5 0.3 0.1 12.0 12.8 12.8 Shree Cement 830 23,729 SELL 21.4 19.2 17.8 294 283 257 (0.3) (0.3) (0.3) 13.7 12.4 11.9 Ambuja Cements 420 211 BUY 11.9 10.5 9.5 133 126 124 (0.7) (0.7) (0.7) 6.8 6.9 7.0 ACC 260 1,392 BUY 8.9 8.9 8.2 104 105 104 (0.4) (0.4) (0.4) 11.6 12.3 12.5 Ramco Cements 184 778 NEU 16.8 14.4 11.6 170 161 146 0.4 0.4 0.2 13.5 14.2 15.0 Dalmia Bharat 154 798 BUY 8.8 8.9 7.8 111 93 78 0.4 0.4 0.3 2.8 2.4 3.1 JK Cement 109 1,415 BUY 11.4 9.7 8.9 111 109 113 0.9 0.8 0.8 16.2 17.3 18.2 Star Cement 37.4 90 BUY 8.3 6.6 6.6 128 112 120 (0.1) (0.2) (0.0) 16.7 17.7 18.2 JK Lakshmi 37.8 322 BUY 7.0 6.3 6.0 64 64 54 0.6 0.5 0.4 15.6 17.2 14.9 Orient Cement 17.1 84 BUY 8.1 6.9 6.8 56 55 61 1.1 0.9 1.0 7.4 11.1 15.0 Deccan Cements 3.92 279 BUY 4.1 2.9 3.4 25 22 30 (0.1) (0.1) 0.1 11.5 12.7 13.8 Source: Company, HDFC sec Inst Research, For ACC and Ambuja, the financial year is CY19/CY20E/CY21E resp
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CEMENT : 3QFY20 REVIEW
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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CEMENT : 3QFY20 REVIEW
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