The recent surge in prices of key inputs (Coal, petcoke) due to the Russia-Ukraine conflict will significantly impact cement earnings in the near term.
? Our analysis of the past two input cost inflation cycles (FY11-12 and FY18-19) shows that cost increases were passed on within 3-4 quarters. However, given a much higher increase in input prices this time around, the pass-through may take longer, in our view.
? Cement stocks are likely to be in a trading range in the near term, driven by volatility in commodity prices. Nonetheless, our medium-term cement upcycle thesis remains largely intact, albeit with a more gradual reset in profitability (RoIC), underpinned by improving demand-supply dynamics, better price discipline, and cost optimization and de-risking efforts.
? Baking in higher input costs, we cut aggregate EBITDA by 17%/10% for FY23E/FY24E. After ~20% correction in stock prices over the past three months, cement EV/EBITDA multiples are now 20% lower vs. recent peak, and 5% below their trailing 1Y avg. As such, we view risk-reward as favorable, even as the catalysts may be 1-2 quarters away.
? We retain our preference for Ultratech, Ambuja, and Shree Cement among the large-caps, based on their scale, market mix, growth pipeline/aspirations, cost efficiencies and healthy balance sheets. We also like Birla Corp among the mid-caps and Sagar Cement among the small-caps.