Cement companies are expected to see a steep fall in their margins during the second quarter of the current fiscal. Experts expect the full impact of the usage of high-cost fuel inventory (coal and petcoke) to flow into this quarter, which is likely to spike variable costs by close to 40 percent on year, while on a sequential basis, the impact is likely to be in high single digits.
The second quarter is traditionally a weak one for the Indian cement sector as construction activity slows down due to the monsoons.
Volumes
In Q2FY23, cement companies witnessed soft demand in July and August 2022 but saw a revival in September 2022 on the back of higher retail as well as institutional demand, supported by lower commodity prices.
Institutional demand was led by increased construction activity after the receding monsoons.
The recovery in retail demand in September was driven by pent-up demand accumulated during the monsoons and pre-Diwali construction and repair work gaining momentum.
Experts expect the cement industry to witness around a 9 percent volume growth year-on-year (YoY), supported by sustained demand from infrastructure projects and recovery in individual housing demand. However, on a sequential basis, the volumes are seen declining by close to 5-6 percent because of the prolonged monsoon in many parts of the country.
“Industry is likely to see ~5 percent y-o-y volume growth in Q2FY23 aided by the low base of east and south India,’’ said a report from Antique Stock Broking.
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Cement Pricing
Cement prices during the quarter are expected to dip by mid-single digits on a sequential basis. This despite the industry trying to implement price hikes during the quarter. At the same time, prices are seen to be increasing by around 3 percent compared to the same period last year.
“Many price hikes were attempted in Q2FY23, but were followed by roll-backs,’’ said a report from Elara Capital. “Our channel checks show the all-India average cement price is likely to dip ~5 percent quarter-on-quarter (QoQ), but rise ~3 percent YoY in Q2FY23.’’
The correction in prices of other building materials during the quarter also weakened the sentiment for cement.
According to industry reports, there was a price hike in most regions in September 2022. The companies hiked prices by Rs 10-20 per bag in September due to some recovery in demand.
“We believe that the average exit price of cement in September 2022 was 1 percent higher than the quarter average, largely driven by price hikes in the eastern region towards the latter part of the month,’’ analysts at the brokerage firm Motilal Oswal highlighted.
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Cost pressures
The industry has been severely challenged by higher input costs, fuel prices in particular, for the past six-nine months as energy prices spiked sharply because of the Russia-Ukraine war. However, the prices of both domestic and international petcoke and coal have moderated slightly in the last two months, though they still continue to trade in the upper quadrant.
Petcoke and international coal currently trade at $180 and $310 per tonne. According to experts, a $10 increase in petcoke and imported coal prices increases the cost of cement manufacture by Rs 50-60 per tonne.
“The average price of power/fuel for most cement companies is expected to be in the range of $220-230 per tonne, and since high-cost fuel was consumed during Q2FY23, the negative impact of the same will be reflected in the operating performance of the companies,’’ said analysts at Axis Securities.
The freight cost per tonne is expected to increase 3 percent on year, while other expenses are likely to remain flat. The staff cost per tonne should see a high single digit decline.
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EBITDA
Consequent to higher input costs, the industry’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne are likely to come under stress and tank between 30-45 percent on year and close to 25-35 percent on quarter.
A report from Motilal Oswal said, “The average EBITDA per tonne of Rs 614 is expected to drop 47 percent yoy (a 36-quarter low), while operating margins should drop to 11.1 percent from 21.5 percent last quarter, a 10.4 drop. It expects the sector’s profit to drop 66 percent yoy.
In the recent past, cement stocks have seen a run-up in prices on rising hopes of further consolidation in the industry. The ratings of mid- and small-cap cement stocks were revised upwards in anticipation of an increase in M&A activities.
“We believe that valuations have become expensive after a sharp run-up in the recent past, and we are selective in our picks,’’ said the analysts at Motilal Oswal.
They reiterated a ‘buy’ rating on UltraTech Cement in the large-cap space, and Dalmia Bharat and Birla Corp in mid-caps. They also like Grasim Industries (a diversified play) in the large-cap space.
For the analysts at Axis Securities, Ambuja Cements, Dalmia Bharat, JK Lakshmi, JK Cement, and Star Cements are the top picks.
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