We estimate clinker utilisation there to improve from ~82% in FY19 to 84% and 91% respectively by FY22E against all-India clinker utilisation of 80%.
We expect clinker shortage-led upcycle in North & Central regions to improve realisations/profitability of players having significant presence/planned expansions there. We initiate coverage on JK Cement (PT of Rs. 1,490), ACC (PT of Rs. 1,771) and Heidelberg Cement (PT of Rs. 240) with buy, on Ultratech (PT of Rs. 4,246) & Ambuja Cement (PT of Rs. 197) with hold and Shree Cement (PT of Rs. 16,893) with UNPF.
Focusing on clinker utilisation to analyse the cycle as large scale split-grinding capacity addition to optimise freight cost and gain from state-level incentives has rendered the traditional grinding capacity utilisation metric unrepresentative of the actual demand-supply scenario, with the divergence at regional level being starker.
Our regional clinker supply analysis indicates the making of an upcycle in north and central regions. We estimate clinker utilisation there to improve from ~82% in FY19 to 84% and 91% respectively by FY22E against all-India clinker utilisation of 80%.
Expect realisations in north and central regions to improve, benefiting incumbents with material presence and significant expansion potential there. This improvement will be long-term, given the potentially longer tenure of the upcoming cycle on account of increasing difficulty & cost of land acquisition and reverse auctioning of limestone mines.
Our stock preference is driven by presence and expansion potential in favorable regions, reasonable valuations. Both factors are equally important in our stock selection framework, which is why Shree Cement, despite having ~70% capacity in favourable regions misses out as it’s trading at FY22E EV/Ebitda multiple of 15x.
We are initiating coverage on JK Cement, ACC, Heidelberg with buy for their large exposures to favorable regions, Ultratech & Ambuja with hold for reasonable valuations and Shree Cement with UNPF.
Like JK Cement the most (almost on the whole street), for its 15 MTPA unexecuted limestone mining lease in central region and downside support from robust white cement/wall putty franchise, followed by ACC.