Cement firms stare at downside risks to FY24 estimates without price hikes

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Cement makers may disappoint on the price-hike front for a second consecutive year after robust demand was not complemented with sustained price hikes last year, say brokerages.

“Pricing power is crucial in the commodity business and the Indian cement sector is certainly losing the plot on that front,” wrote analysts with ICICI Securities in an April 19 report, adding that of the seven cement companies in their coverage, JK Cement is the only "buy" recommendation.

Typically, cement companies witness their best sale volumes between January and June of every year. Construction activity in India peaks in these first six months owing to fiscal year-end related targets and the rush to complete construction before the onset of monsoon.

That is also why many analysts are closely watching price-hike developments for April to predict the course for the rest of the year. However, some are already sceptical.

Analysts with Ambit Capital, for instance, expect these seasonal cement price hikes to be fleeting. In their April 6 report, the analyst said they expect realisation per tonne for the industry to decline in FY24, and see a downgrade risk to consensus estimates.

As cement makers focus on expanding volumes and retaining market share, pricing power has taken a beating.

Analysts with ICICI Securities in their note pointed out learnings from the past (where demand rose but margins slipped) and underlying competitive intensity suggest downside risk to consensus earnings.

Price hikes mixed bag

To be sure, cement makers attempted to hike prices at the start of April in some pockets. The response to these hikes has been a mixed bag so far, according to cement dealers Moneycontrol spoke to last week.

“Prices were hiked in April by about Rs 30 per bag, and they are planning to increase it by another Rs 10 soon,” said a Hyderabad-based cement dealer. The hike was confirmed by a second dealer from the same market.

Other markets such as some parts of Rajasthan have not had similar success. “No hikes were taken in April so far, it has been increased today (last week) for Rs 10 per bag, this should be able to sustain,” said a Rajasthan-based cement dealer.

While Ambit sees a downgrade risk to FY24 consensus estimates, HDFC Securities has trimmed expectations for the next two financial years.

Expectations trimmed

HDFC Securities said it has trimmed its industry Ebitda unitary estimates by Rs 10-20 a tonne each for FY23, FY24 and FY25. This is owing to sub-par cement price increases, analysts wrote in the report. Ebitda is earnings before interest, taxation, depreciation and amortisation.

Cement dealers from the North India market also remain less hopeful of any hikes. “Cement companies have not taken a price hike for the last three–four months, no hike is expected anytime soon,” said a cement dealer from Himachal Pradesh.

A dealer operating closer to the national capital expressed similar views, stating there is limited scope for a price hike. A third dealer from Delhi said a small hike was attempted this week.

Cement channel checks by Anand Rathi suggest a similar trend for hikes taken in April. “In Surat, of the Rs 10-a-bag hike, only Rs 5 could be sustained. In Vidarbha, price hikes attempted by companies could not be absorbed,” analysts with Anand Rathi wrote in an April 17 note.