Sector Update | 7 September 2022

Cement

Cement
Impacted by seasonal headwinds; eyeing a recovery
Favorable sector dynamics beyond 1HFY23
 We expect the recent correction in petcoke prices to aid a reduction of
~INR280/t in operating cost in 3Q, after an increase of INR200-250/t in 2QFY23.
The key risk to our assumption is any increase in coal prices due to the
deepening of the energy crisis in Europe.
 We expect Cement demand to rise 2-3% YoY in Jul-Aug’22 (5-6% on a three-year
CAGR basis). Demand in a few markets (such as Punjab) was impacted by sand
unavailability issues. However, we expect cement demand to improve after the
monsoon season ends.
Average price of Cement per 50-kg  Cement prices remained under pressure and declined by 1-3% MoM across regions,
bag declined 1% MoM in Aug’22 excluding the South, in Aug’22. Pan-India average Cement price fell ~5% in 2QFY23
till date v/s its 1Q average. A few of the dealers in North & Central India and Gujarat
indicated likely price hikes in the range of INR10-20/bag in Sep’22.
 Spreads (realization less variable costs) seems to be lower by INR425-430/t in
2QFY23. However, spreads in Sep’22 are up INR100/t v/s its 2QFY23 average.
Profitability should bottom out in 2QFY23, barring any adverse movement in
Cement and coal prices. Cement prices tend to improve after the festive season.
Demand in Jul-Aug’22 up 2-3% YoY and 5-6% on a three-year CAGR basis
 Cement demand is up in low single-digits (2-3% YoY) in Jul-Aug’22, but rose in mid-
single digits (5-6%) on a three-year CAGR basis.
 In Jul’22, North, Central, and some parts of East India (Bihar and Chhattisgarh)
Petcoke prices softened over past witnessed resilient demand MoM on account of a delayed monsoon. In West and
couple of months South, except Tamil Nadu, and some part of East India (West Bengal and Odisha)
volumes declined sharply MoM due to heavy rainfall. In Aug’22, demand declined
across markets with an increase in rainfall.
 Demand should improve from mid-Sep’22 after the monsoon season. We
estimate Cement demand to grow at 8% YoY each in FY23/FY24.
Prices drop MoM across regions, excluding South India
 Cement prices declined by INR5-10/bag (1-3%) across regions (excluding South
India) in Aug’22 due to seasonal factors. All India average Cement price fell ~5%
QoQ in 2QFY23 till date as price hikes taken in 1Q were largely rolled back.
 Average cement price in East India fell 3% MoM in Aug’22, while it declined by
1-2% in the West, Central, and North. In South India, average Cement prices
Spreads to improve from Sep’22 remained flat (price hike in the Kerala market offsets the drop in Karnataka and
Tamil Nadu). Cement prices in the East fell 8% QoQ in 2QFY23 till date, but
declined by 4-5% in West, Central, and North, and 2% in the South India.
 A few of the dealers in North & Central India and Gujarat indicated likely price
hikes in the range of INR10-20/bag in Sep’22.
Petcoke stays cheaper than imported coal, benefits to reflect from 3QFY23
 Petcoke prices have declined over last three months and trailing 36-48% cheaper
than imported coal. We expect energy cost to remain elevated in 2Q, but
moderate from 3QFY23.
 Domestic petcoke prices fell 16% MoM to INR15,699/t in Sep’22 and is ~30%
lower from its peak in Jun’22. While US and Saudi Arabia’s petcoke prices declined
by 11% MoM to USD160-165/t in the first week of Sep’22 and are ~40% lower
Sanjeev Kumar Singh - Research analyst (Sanjeev.Singh@motilaloswal.com)
7 September
Mudit 2022
Agarwal - Research analyst (Mudit.Agarwal@motilaloswal.com) 1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and
 Cement

from its peak in May’22. South African/Australian coal prices remained elevated at
over USD300/USD400 per tonne.
 Diesel prices remained flat MoM in Aug’22. Diesel prices are currently 6%/3%
lower than the average price in 1QFY23/2QFY22.
See spreads in 2QFY23 at the lowest in the last five years, the same appears
to be improving in Sep’22
 Based on variable costs and Cement price movements over the past few
months, we estimate average spreads in 2QFY23 for trade sales (Cement price
net of GST but after subtracting variable costs) to be INR425-430/t lower than
its 1QFY23 average (if Aug’22 exit prices sustain in Sep’22).
 However, spreads in Sep’22 appear to be higher by ~INR100/t as compared to
its 2QFY23 average. Hence, profitability should improve in 3QFY23.
Valuation and view
 In 1QFY23, OPM declined by 1.2pp QoQ (for our Coverage Universe) as the
improvement in realization partly offsets cost increases. We expect margin in
2QFY23 to contract sharply due to the combined impact of high-cost fuel
consumption, correction in Cement prices, and negative operating leverage.
 We have already factored in the impact of seasonality and high-cost fuel
consumption in our earnings estimates, and hence don’t foresee any risk of
earnings downgrades in the current scenario.
 We are positive on Cement industry dynamics over the next few years, due to:
1) better demand prospects, led by the Infrastructure and Housing sector, 2)
increased consolidation in the industry, and 3) regulatory changes in the
allotment of limestone blocks. Over the next three-years, we expect a demand
CAGR of ~8%, which is likely to surpass installed capacity CAGR of 5.4%. We
prefer regions with a favorable demand-supply situation and better pricing
power like North and Central India, and to some extent the West (where
Infrastructure demand remains robust).
 UTCEM is our top pick in the largecap space. We prefer DALBHARA and BCORP
in the midcap space.
Exhibit 1: Valuation summary
M-cap CMP P/E (x) EV/EBITDA (x) EV/t (USD) RoE (%) Net debt/EBITDA (x)
Rating
(USD b) (INR) FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E
UltraTech Cement 24.5 6,768 Buy 37.9 30.3 18.0 14.9 185 182 9.8 11.3 0.1 (0.2)
Shree Cement 10.5 23,166 Neutral 59.9 45.2 24.4 19.5 202 181 7.8 9.6 (2.1) (1.6)
Ambuja Cements 11.2 449 Neutral 34.9 29.7 25.1 19.3 261 256 17.5 19.1 (1.7) (1.3)
ACC 5.7 2,406 Neutral 43.5 27.2 19.8 13.7 131 125 7.3 11.2 (3.0) (2.5)
Dalmia Bharat 3.8 1,603 Buy 49.3 39.1 12.8 10.7 89 76 3.8 4.7 (0.3) 0.2
The Ramco Cements 2.3 772 Neutral 56.5 30.1 20.0 14.2 134 128 4.9 8.6 3.8 2.4
JK Cement 2.7 2,820 Neutral 36.2 30.6 15.5 14.0 191 166 13.3 14.2 2.1 1.8
Birla Corp 1.0 1,049 Buy 35.4 17.1 10.1 7.5 69 64 3.7 7.4 2.7 1.9
India Cements 0.9 237 Sell (71.1) 39.3 36.0 14.3 78 76 (1.8) 3.1 10.4 3.9
JK Lakshmi 0.7 499 Buy 16.6 13.1 7.5 6.2 49 45 13.6 15.3 (0.4) (0.9)
Grasim Industries 14.4 1,750 Buy 40.4 41.3 27.1 26.4 N/A N/A 13.6 11.5 0.0 (0.3)
Source: MOFSL, Company

7 September 2022 2
 Cement

Story in charts
Exhibit 2: Industry spreads* decline in Jul-Aug’22, expect an improvement from Sep’22
(INR/t) (INR/t)
Spreads (Prices - Variable cost) EBITDA - (RHS)
3,000 1,600

2,500 1,300

2,000 1,000

1,500 700

1,000 400

Jun-17

Jul-20

Nov-21

Jun-22
Apr-18

Apr-21
Aug-16

Aug-18
Nov-18

May-19

Aug-21
Dec-16
Mar-17

Jan-18

Feb-19

Sep-19
Dec-19
Mar-20

Jan-21

Feb-22

Sep-22
Oct-17

Oct-20
Source: MOFSL; *Price (net of GST) less variable cost

Exhibit 3: Expect variable cost of production to peak out in 2QFY23

Movement in coal cost/t QoQ* Movement in variable cost/t QoQ^

600

300

-300

-600
2QFY22

3QFY22

4QFY22

1QFY23

2QFY23E

3QFY23E
Source: MOFSL; *as per our calculation; ^reported average variable cost of coverage companies, E:
MOFSL estimate

Exhibit 4: All India average Cement price fell 1% MoM in Aug’22 Exhibit 5: Average Cement price fell 2% MoM in North in Aug’22

Average price INR/ 50 kg bag % Change YoY (RHS) North retail price INR/ 50 kg bag % Change YoY (RHS)
9% 16%
6% 10%
349

344
347
346

351
339

336
346
341

344

344
343
331
331

336
336
323

3% 4%
0%
347
343

334
345
354
370
369
355
350
345

-2%
352
358
378
398
378
368
360

-3%
-8%
Jul-21

Jul-22
Apr-21
May-21
Jun-21

Apr-22
May-22
Jun-22
Mar-22
Aug-21
Sep-21

Nov-21
Dec-21

Feb-22

Aug-22
Oct-21

Jan-22

Jul-21

Jul-22
Jun-21

Jun-22
Apr-21
May-21

Nov-21

Apr-22
May-22
Aug-21

Aug-22
Sep-21

Dec-21
Jan-22
Feb-22
Mar-22
Oct-21

Source: MOFSL, Cement dealers Source: MOFSL, Cement dealers

7 September 2022 3
 Apr-21 105 Apr-21 120 Apr-21 377 Apr-21 353
May-21 107 May-21 128 May-21 389 May-21 348
Jun-21 125 Jun-21 127 Jun-21 374 Jun-21 348
Jul-21 140 Jul-21 160

7 September 2022
Jul-21 374 Jul-21 343
Aug-21 150 Aug-21 170 Aug-21 338
Aug-21 367
Sep-21 185 Sep-21 190
Sep-21 367 Sep-21 338
Oct-21 220 Oct-21 200
Oct-21 387 Oct-21 348
Nov-21 150 Nov-21 200
Dec-21 180 Nov-21 373 Nov-21 357
Dec-21 135
Jan-22 143 Jan-22 163 Dec-21 353 Dec-21 333

South African coal (USD/t)

Feb-22 205 Feb-22 200 Jan-22 362 Jan-22 338

South retail price INR/ 50 kg bag

Mar-22 303 Mar-22 260 Feb-22 384 Feb-22 342
Central retail price INR/ 50 kg bag

Imported petcoke price (USD/t)

Apr-22 289 Apr-22 277 Mar-22 392 Mar-22 353
May-22 320 May-22 274 Apr-22 392 Apr-22 373

Exhibit 10: Average USA petcoke prices correct…

Jun-22 322 Jun-22 251 May-22 373 May-22 373
Jul-22 336 Jul-22 223 Jun-22 363 Jun-22 364
Aug-22 319 Aug-22 183 Jul-22 369 Jul-22 353

Exhibit 12: South African coal prices stay at elevated levels

Sep-22 170

YoY growth (%)

Sep-22 347 Aug-22 368 Aug-22 348

0%
YoY growth (%)
Exhibit 8: Average Cement price stay flat MoM in South in Aug’22
Exhibit 6: Average Cement price fell 1% MoM in Central in Aug’22

0%
5%

50%

10%
80%
0%
4%
7%

-5%

-50%

-60%
10%
15%
% Change YoY (RHS)

100%
150%
% Change YoY (RHS)

-4%

Source: MOFSL, Cement dealers

Source: MOFSL, Cement dealers

150%
220%
11%

Source: MOFSL, Industry

Source: MOFSL, Bloomberg, Industry
Apr-21 87.8 Apr-21 11,203 Apr-21 333 Apr-21 317
May-21 92.5 May-21 11,357 May-21 338 May-21 317
Jun-21 96.7 Jun-21 11,489 Jun-21 328 Jun-21 314
Jul-21 97.5 Jul-21 12,783 Jul-21 319 Jul-21 319
Aug-21 96.5 Aug-21 13,914 Aug-21 321 Aug-21 293
Sep-21 97.5 Sep-21 15,417 Sep-21 321 Sep-21 293
Oct-21 105.5 Oct-21 16,360 Oct-21 349 Oct-21 303
Nov-21 94.1 Nov-21 20,781 Nov-21 352 Nov-21 285
Dec-21 94.1 Dec-21 15,680 Dec-21 270
Dec-21 324

Diesel price (INR/ltr)

Jan-22 94.1 Jan-22 13,984 Jan-22 292
Jan-22 336
Feb-22 94.1 Feb-22 14,522
East retail price INR/ 50 kg bag

West retail price INR/ 50 kg bag

Feb-22 341 Feb-22 308

Mar-22 100.1 Mar-22 17,980 Domestic petcoke price(INR/t) Mar-22 318
Mar-22 349
Apr-22 104.8 Apr-22 21,816 Apr-22 333
Apr-22 375
May-22 97.3 May-22 22,257 May-22 338
May-22 365
Jun-22 97.3 Jun-22 22,473
Jun-22 354 Jun-22 318
Jul-22 94.3 Jul-22 20,144
Jul-22 351 Jul-22 308
Aug-22 94.3 Aug-22 18,716
Aug-22 348 Aug-22 300

YoY growth (%)

Sep-22 15,699

Exhibit 13: Diesel prices remain flat MoM, but down 3% YoY
Sep-22 94.3
Exhibit 11: …and so is the case with domestic petcoke prices
Exhibit 7: Average Cement price fell 3% MoM in East in Aug’22

Exhibit 9: Average Cement price fell 1% MoM in West in Aug’22

0%
5%

YoY growth (%)

-5%

0%
5%
10%
15%
% Change YoY (RHS)

0%
-5%

5%
% Change YoY (RHS)

10%
15%

Source: MOFSL, Cement dealers

Source: MOFSL, Cement dealers

40%
80%

20%
35%
50%
-40%

4
-10%

Source: MOFSL, Industry, Bloomberg

120%
Cement

Source: MOFSL, Industry

 Cement

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >=15%
SELL < - 10%
NEUTRAL < - 10 % to 15%
UNDER REVIEW Rating may undergo a change
NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be
within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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7 September 2022 5
 Cement

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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980
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71881000. Details of Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-71881085.
Registration details of group entities.: Motilal Oswal Financial Services Ltd. (MOFSL): INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-
2000; Research Analyst: INH000000412. AMFI: ARN.: 146822. IRDA Corporate Agent – CA0579. Motilal Oswal Financial Services Ltd. is a distributor of Mutual Funds, PMS,
Fixed Deposit, Insurance, Bond, NCDs and IPO products. Customer having any query/feedback/ clarification may write to query@motilaloswal.com. In case of grievances for any of
the services rendered by Motilal Oswal Financial Services Limited (MOFSL) write to grievances@motilaloswal.com, for DP to dpgrievances@motilaloswal.com.

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