Results preview I Cement makers stare at a grim Q2 amid near-decade-low prices and weak demand

Cement sector (File pic)

Cement manufacturers are likely to report a largely sluggish set of financial results for the July-September 2024 quarter, as near-decade-low prices and continued demand inertia from multiple sectors weigh on margins, according to analysts and brokerages.

The situation has been made worse by excessive rainfall and heatwaves in the country.

Nearly all brokerage houses are cautious on the cement sector, as price growth has almost stalled and demand is yet to recover from the impact of the General Elections, delayed allocations to major infrastructure projects, and heavy monsoon rains, especially in August.

In contrast, much of India was rainfall-deficient in August 2023, which had enabled strong sales, as well as price hikes.

While some cement makers have expressed confidence in leveraging lower prices of key inputs, especially fuel, analysts say that with multiple attempts to raise cement prices having come to nought, margins are expected to weaken overall.

Weak margins seen

According to Elara Securities, companies in its coverage universe, which includes most of the large cement makers as well as key regional manufacturers, may see their earnings before interest, taxes, depreciation, and amortisation (EBITDA) decline by 25 percent year-on-year (y-o-y) for the reporting quarter, which would also represent a 30 percent fall on a sequential basis.

"We expect weak demand and soft cement prices will severely affect profitability of our coverage universe in Q2FY25...while access to low-cost fuel could offer partial relief, this benefit is likely to be offset by seasonality-related challenges in the form of negative operating leverage and increased spending on repairs and maintenance," Elara Securities said in a report.

With consolidation continuing at a relatively frenetic pace in the industry, led by the top two players UltraTech Cement and the Adani Cement-owned Ambuja Cements and ACC, margins are expected to stay softer, as players push back pricing growth in favour of ramping up their market shares.

On the per-tonne basis as well, EBITDA is expected to be soft in the quarter ended September 30, primarily led by low cement prices, currently estimated to be at a decadal low for some markets, analysts said. For companies within its coverage in the reporting quarter, Axis Securities estimates a drop of around 20 percent in the per-tonne EBITDA to around Rs 680, down from Rs 865.

Further, Sharekhan analysts expect sales volume growth to remain weak at just 1.7 percent y-o-y (down 13.3 percent quarter on quarter) hit by weak demand from government led infrastructure projects (time lag of fund allocations post elections) and heavy monsoon rains.

Volume growth to be minimal y-o-y

Brokerage houses pencilled a modest y-o-y cement volume growth for Q2 in the range of 2-5 percent, which represents a 10-20 percent decline in volumes on a sequential basis. According to a report by Prabhudas Lilladher, a variety of factors hindered demand across regions, including extreme weather, labour shortages, as well as the unavailability of sand in some parts.

"South was challenged by a labour shortage and less infrastructure activities due to elections. North and central regions were also affected by sand unavailability due to the closure of ghats amid monsoon. Monsoon hindered demand across regions. West region mostly saw demand coming from the realty sector, but infrastructure project activities remained low," said the Prabhudas Lilladher report.

The silver lining

However, some analysts said that with favourable cost conditions and established brand names in some regions, a few regional cement players may experience a degree of volume growth for the July-September quarter, bucking a recent trend in which many regional players either lost market share or were acquired by larger competitors.

“Regional players with strong branding and new capacities may do well. Star Cement is expected to report volume growth in the range of 8 to 9 percent on the back of new capacity. Similarly, other players with new capacities in the east and south may show some volume growth, despite challenges around pricing,” Uttam Kumar Srimal, senior analyst, Axis Securities, said.

Meanwhile. industry players estimate strong demand in H2FY2025, especially post the festive season, led by the kickstart of government spending on infrastructure and sustained demand from the housing sector. Further, lower power and fuel costs and stable freight costs are expected to aid operational profitability for the industry during H2FY2025, according to Sharekhan.