Front-ended price hikes to support margins; north players well placed. In CY19, the cement sector was plagued with worries related to weakening demand overshadowing pricing-led EBITDA growth. Only three cement companies from our coverage universe (JK Cement, Ramco and Shree) outperformed the Nifty.

We expect five key trends to emerge in CY2020, such as recovery in volume growth to 6% backed by pick-up in spends on infrastructure development (roads, irrigation, metros, etc.), limited clinker expansion, which should help clinker utilisation rise to 79%, front-ended price hikes after continuous decline in the past six months, benign costs in 1H on lower petcoke prices, and further sector consolidation (Emami, Murli, Vadraj), which should support prices.

We prefer companies that have an ability to gain market share, are moving down the cost curve, and provide valuation comfort. Therefore, UltraTech is our top large-cap and JK Cement our top mid-cap pick. We also like ACC as a value pick. We do not see much upside in Shree and Ramco, as their potential market share gains over the next three years is already priced in.

We are positive on the cement sector’s structural outlook. Clinker utilisation (ex-South) is on track and should rise to ~85% by FY22, a level at which industry has historically gained pricing power. Clinker utilisation has improved in the last 3 years– from a low of 70% in FY17, it is estimated at 77% in FY20 (marginally lower than FY19 due to weak demand growth).

While our bottom-up industry supply model shows only a 3.4% CAGR in clinker capacity additions for FY20-22, cement demand is estimated at 6% CAGR led by infrastructure development and recovery in private demand – cement demand in India has historically grown at 1.1x of real GDP growth.

We expect CY20 to usher in price hikes after the continuous decline (~`30/bag or 9%) seen in 2HCY19.

We have already seen some hikes being implemented (~`10/bag or 3%) and would expect the industry to attempt more hikes over the next few months as demand has been improving seasonally (i.e. month-on-month).