Cement companies are likely to report muted earnings for the first quarter of FY23 as they continue to reel under the margin pressure which are being eaten away by increasing operating costs, while the movement in realisations have not kept pace with the costs. The prices of coal and pet coke continue to witness a northwards trend while power and fuel costs have also increased significantly during the quarter ended June 2022.
Cement Prices
According to industry reports, cement prices increased in April but declined in May-June, led by correction in East, Central and West India. June was the second consecutive month when cement players had to roll back price hikes, which is expected to reflect in their weak topline.
The companies hiked prices in April from Rs 15-Rs 60 per bag to combat rising input costs depending upon the regions. “The price hike was the sharpest in North and Central regions, followed by East and West. In the South, while prices were lower to flat year-on-year, they started correcting towards the end of April, followed by further correction in May-June by Rs 15- Rs 30 per bag depending upon the regions,” a report from Axis Securities said based on its channel checks. The companies tried to raise prices again but rolled it back in the face of weak demand.
“Directionally, realisations remained volatile in Q1 and despite multiple attempts by industry to improve realisations, the impact on blended realisations is expected to remain muted,” a report from Phillip Capital said. It expects blended realisations for to improve 1 percent on-quarter and 3 percent on-year.
Axis Securities, on the other hand, estimate the realisations to be higher by 2-3 percent on-quarter and by 4-5 percent on-year which is expected to reduce the burden of rising input costs to some extent.
Volumes
The higher input prices of steel and cement impacted the demand for cement which started on a weak note in April. But the demand gathered pace since May as commodity prices eased.
“We estimate industry demand to increase by 12 percent on-year in Q1FY23 on a low base of Q1FY22 that was impacted by Covid,” a report from Kotak Institutional Equities said. Sequentially, however, the volumes are likely to remain soft and might take a dip of 5–8 percent.
According to the industry reports, rural demand continues to be subdued. Urban and semi-urban demands, too, were scattered based on the regions.
Demand from government infrastructure projects picked up pace ahead of monsoons and continues to offset weakness in trade demand.
Better demand in non-trade channels supported cement offtake and the data released by core sector output also suggests the cement production has improved by 15-16 percent in April-May compared to the last year owing to the lower base.
Input Costs
The industry continues to be plagued by a surge in input costs over the past few months. The energy prices have witnessed a steep rise in response to the Russia-Ukraine conflict. The prices of both the domestic and international pet-coke jumped more than 50 percent since February, while the coal prices have jumped two-folds over the same period.
Prices have, however, corrected in the recent months by 10-15 percent both in the case of pet coke and imported coal. The average US pet coke prices declined by 10 percent month-on-month in June to $245 per tonne and a similar drop has been seen in domestic pet coke prices. It is positive for the cement sector from a medium-term perspective, but the extent of margin improvement would depend on the mix of fuels used by the companies.
It may be noted that a $10 increase in pet coke and imported coal prices increases the cost of cement manufacturing by Rs 50-60 a tonne.
“Average consumption prices of power/fuel for most of the cement companies are expected to be in the range of $210-220/tonne from $170-180/tonne earlier,” a report from Axis Securities said.
While diesel prices have corrected since the government has reduced excise duty on the same, they are still expected to be marginally higher. This will lead to a sequential increase in the overall cost of production of cement companies during the reported quarter and onwards.
EBITDA
Due to the negative impact of input costs, the EBITDA (earnings before interest, tax, depreciation and amortisation) per tonne for the sector is expected to tank 20–30 percent on-year to about Rs 900–990 per tonne. Sequentially, this is a decline of 10–12 percent.
“UltraTech Cement, Shree Cement and JK Cement are the only three manufacturers where we expect EBITDA/tonne to be upwards of Rs 1,000 while South based manufacturers are likely to be the worst performers on their respective profitability driven by weak pricing sentiments coupled with inefficient ground practices,” a report from Phillip Capital said.
“Cement stocks (except ACC and Ambuja Cements) have underperformed broader indices (17-38 percent underperformance v/s BSE in CY22 till date) on concerns of margin contraction,” a report from Motilal Oswal Financial Services said.
“We believe that valuations have become reasonable after a steep correction in stock prices and maintain UltraTech Cement as our top largecap pick, whereas Birla Corp is our preferred midcap pick apart from Grasim (a diversified play) in the largecap space.”
The preferred picks for Axis Securities are ACC, Dalmia Bharat, JK Lakshmi, JK Cement, Birla Corp, and Heidelberg Cement.
Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
