In cement sector update, Motilal Oswal Securities said that its channel checks suggest that the much anticipated price hikes have materialized in March, with prices up by Rs 20–30/bag month on month (MoM) in South and East and Rs 10–15/bag in other regions.
Demand remains strong, with growth in the high single digits in most regions (except South), which should help absorb these hikes. These hikes should also alleviate concerns on near-term margins from the sharp cost inflation seen in the last few months – petcoke, coal, and diesel prices are up 74 per cent, 24 per cent, and 34 per cent year on year (YoY), respectively.
Following around 10 per cent YoY growth in volumes in October-December quarter (Q3FY21), the brokerage firm expects the sector's volumes to grow around 20 per cent YoY in January-March quarter (Q4FY21) (supported by the low base of 4QFY20 – volumes declined 13 per cent YoY on government-mandated lockdown in Mar’20).
Demand has been robust over Jan–Feb (+8–10 per cent YoY), led by a strong uptick in urban real estate and infrastructure activity. Regionally, demand continues to be strong in East, North, and Central, while it has now revived in West. South, however, remains weak with around 10 per cent YoY decline, the brokerage firm said.
“While we are structurally positive on the industry outlook, we prefer North and Central as these markets
have a higher clinker utilization of over 80 per cent. We adopt a bottom-up stock-picking approach and prefer companies that are moving down the cost curve, have the potential to gain market share, and provide valuation comfort,” it said.
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