Our cement coverage reported an 18% y-o-y fall in Q1FY23 Ebitda (4% beat) on cost pressures. The small beat was driven by better realisation. Petcoke, a key cost, is down >30% vs the Q1 avg. and will likely reduce cost pressure in Q3FY23. Soft cement prices should be reflected in weak Q2 profitability, but the high base wanes from Q3FY23. We remain selective given the capacity additions overhang. We boost UltraTech Cement’s (UTCEM’s) multiple, staying at Buy, and downgrade Ramco Cements (TRCL) to Underperform.
Q1FY23 Ebitda marginal beat: The Ebitda beat was driven by better realisation growth at 6-6.5% q-o-q, +6% y-o-y. Q1 avg Ebitda/t declined ~Rs 420 y-o-y/Rs 15 q-o-q. Cost/t for Q1 increased 21% y-o-y/8% q-o-q. UTCEM, J K Cement, and TRCL outperformed and were the select few to report q-o-q growth in Ebitda.
Easing costs likely to benefit from Q3FY23: Key cost item Petcoke has declined >30% vs Q1FY23 average. To contain inflation, the Centre reduced diesel prices, which are down 4-5% vs Q1FY23 average. International coal cost is largely stable vs Q1FY23 avg. The decline in petcoke/diesel costs is likely to reduce overall costs starting in Q3FY23, which should also contain the impact of earnings cuts during Q1 results.
High base for profitability wanes from Q3FY23: Cement companies’ profitability for the past three quarters has declined sharply on a y-o-y basis as companies could not pass through sudden cost spike immediately and the base was also high. While we expect profitability in Q2FY23 to be weak as cement price decline for Q2 so far is the highest in 10 years, the sharply falling trend in y-o-y profitability is likely to reduce from Q3 as the margin base eases. Cement firms may even report y-o-y growth in Ebitda if volume growth turns out be robust given a weak base for volumes for Q3FY23.
Divergence in capacity expansion trend: While there is no major new expansion announcement in the industry post the announcement of UTCEM/Shree Cement in Jun’22, overall the rate of capacity addition remains steep over FY23-FY25, though over 60% of capacity is being added by the top 4 players.
Boost target multiple for UTCEM and downgrade TRCL: We boost UTCEM’s target multiple from 13x to 15x to reflect the outperformance in Q1FY23 and strong volume growth potential. We downgrade TRCL to Underperform given rising competitive pressure in the South, reduced BS strength, and full valuations.