The cement sector continued to grapple with sudden spikes and steep falls in demand through the last few months because of various reasons.
After a significantly subdued November, the sector saw a sharp uptick in cement demand in December which continued till the end of January. But it softened in February on account unavailability of labour during elections in five major states that had sharply disrupted construction activities in large parts of India. The demand recovered sharply in March, particularly towards the second half, driven by both trade and non-trade segments.
According to a report from brokerage firm JM Financial Institutional Securities Ltd, the overall volumes are expected to report a marginal 1 percent on-year growth in the fourth quarter because of a high base of last year.
Strong traction was seen in non-trade channel which was supported by various infrastructure and housing projects backed by the central government. These projects continued at a good pace, although there was a little slowdown in February due to the elections.
“Rural demand, which was the torchbearer last time, has yet not recovered, keeping the overall cement demand rather muted,” Axis Securities said in a report.
On a positive note, however, urban and semi-urban demand picked up as the construction activity gained pace in a seasonally strong Q4. As per the rail freight data, cement volumes transported recorded a sequential rise of 24 percent in Q4FY22.
Experts expect cement demand to remain robust in the first quarter of FY23 with the onset of peak season and increase in construction activities driven by a pick-up in government projects. Non-trade demand will get support from the National Highways Authority of India (NHAI), which has accelerated its road project awarding activities.
Strong real estate demand and improvement in rural demand after a good rabi crop harvest season will auger well for the overall improvement in the demand for the sector.
Cement prices improved across regions in Q4FY22 as compared to its December 2021 exit prices. The companies hiked prices by Rs 15-40 per bag in January to combat rising input costs. There was some rollback in prices in the next month but a hike of Rs 10-15 a bag was done in March to mitigate higher costs.
“On a sequential basis, we estimate realisations to be higher by 1-2 percent on the back of higher prices while on a YoY basis, the realisations are estimated to be higher by 5-6 percent,” a report from Axis Securities said. The buoyancy in cement price is expected to reduce the burden of rising input costs moving ahead.
“We expect average cement prices in the eastern region to be up 7 percent on quarter, 2 percent in North and South India, 1.5 percent in West India, but prices remained flat in the Central India,” a report from Motilal Oswal said. Basis this, the pan-India average price is likely be up 2 percent QoQ and 5 percent YoY in Q4FY22.
Higher variable costs due to an increase in coal and petcoke prices will impact the profitability of cement players for the quarter. The sector will continue to feel the pinch unless the coal and diesel prices reverse their rising trend.
Imported coal and petcoke prices are higher by 70 percent and 40 percent, since January and the situation worsened with the Ukraine conflict. Diesel prices are also trending higher after the completion of the state election pushing the overall costs of cement production as fuel and diesel form 40 percent of the overall costs.
“All this will lead to a sequential increase in the overall costs of production of cement companies during the quarter and beyond,” a report from Axis Securities said.
Although crude prices have cooled off from recent highs, the situation still remains dynamic and will remain so till the geopolitical crisis between Russia and Ukraine subsides meaningfully.
“We expect the impact of sharp increase in pet-coke and coal prices to be visible in the costs in Q1FY23. However, Q4FY22 too is expected to witness an increase as the consumption costs in Q3FY22 were still lower than spot prices,” JM Financial said in a report.
It expects the sequential rise in the variable costs to be more than offset by operating leverage benefits (+18 percent volume growth QoQ) and cement price improvements of +1 percent QoQ.
On a yearly basis however, experts expect the EBITDA (earnings before interest, tax, depreciation and amortization) per tonne to decline by 14-22 percent.
According to a report from Motilal Oswal, aggregate EBITDA for cement companies is expected to fall by 23 percent YoY. “We expect average operating margin to fall by 6.5 percent YoY to 17.7 percent while average EBITDA/ton is expected to fall by 22 percent YoY (but rise 6 percent QoQ) to Rs 963/tonne,” it said.
Axis Securities expect a 14 percent on-year decline in EBITDA/tonne to Rs 995 due to higher operating costs. “We see higher input costs to impact companies’ operational performance in Q1 and Q2 of FY23 after which it should subside subject to cool off in commodity prices.”
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