Our detailed region-wise analysis suggests robust demand growth of >9% CAGR over FY18-19E would lead to sharp improvement in pan-India clinker utilisation from 67% in FY17 to 77% in FY19E and further up to 80% in FY20E after almost a decade.
We estimate 26 mt cement capacities (5% of total capacities) by FY21E are just additional grinding units not backed by clinker. Clinker-backed cement capacity additions to remain low at <5% CAGR over FY19E-FY21E with majority of additions targeted in high utilisation regions of east and central India.
Demand growth could surprise for second year in a row with 13% growth in H1FY19E after posting 9% growth in FY18. East, central and south regions are leading the growth backed by higher government spending on infrastructure (roads and irrigation), affordable housing, and rural housing demand. While higher crude price and rupee depreciation may impact government spending in H2FY19E, the government recently indicated no cut in capex (in an election year).
We factor 10% demand growth for FY19E and 6.5% for FY20E-FY21E.
As pan-India clinker utilisation is likely to cross 80% by H2FY19E, we believe, companies would be able to take Ebitda-accretive price increases. We prefer east, central and north regions as we expect maximum pricing/ margin uptick in these markets, given our estimate of >85% clinker utilisation from FY20E.
We expect pace of cost escalations (5-6% CAGR over FY18-19E) to decelerate, given likely peak prices of inputs. Gradual but long upcycle; Ebitda/tonne expansion to continue even beyond FY21E: We expect average Ebitda/tonne to improve to Rs 1,023/tonne by FY21E from Rs 880/tonne in FY18. Even beyond FY21E, Ebitda/tonne is expected to expand on the back of increasing utilisation and industry consolidation, and justified by capex cost.
We prefer large caps owing to strong balance sheet which could fund future growth. SRCM/UTCEM are our top picks owing to market share gains. We also like ACC/ACEM on its improving profitability and attractive valuation.