Cement to see marginal impact by diesel price hike: Emkay

Emkay Global Financial Services has come out with its report on cement space. The research firm prefers Grasim, ACC, Shree Cement & Madras Cement.

• 12% hike in diesel price - to increase cost by Rs3/bag. However recent decline in freight rates (-3% mom during Aug-12) could mean net increase in road freight by 3-4%
• Softening of intn’l coal prices(YTDFY13 INR term prices down ~7% from FY12 avgs) to further cushion impact
• Though the diesel price hike could possibly arrest the recent trend of softening in cost pressure, even moderate hikes post monsoon season good enough to cover the cost impact
• We continue to prefer Grasim, ACC, Shree Cement & Madras Cement

Cement Sector - Diesel Price hike of 12% to increase cost by Rs3/bag: The increase in diesel prices is likely to increase freight outwards, Inter unit clinker transfer cost, Inward freight on raw material, limestone mining cost and Inward freight on coal for cement companies. Typically fuel accounts for ~60% of a freight operators cost and hence the truck rentals could go up by 7%. With ~12% increase in Diesel prices effective last night, we estimate cost increase of Rs63/ton or Rs3.1 per bag for cement manufacturers (Assuming 60% cement delivered through road transport). Recent decline in freight rates and international coal prices to cushion impact of diesel price hike:
We believe that this increase in costs led by diesel price hike of ~12% would be partially offset by 2 factors:

• Recent reduction in freight rates by freight operators on the back of lower pricing power owing to weak freight demand in the system as truck rentals in the trunk routes declined 3% - 4% during August 2012 (2nd August – 1st September 2012) with 15%- 20% all round drop in cargo availability across the country. Hence even after a 7% increase in truck rentals, the net increase in freight could just be around 3-4% only (adjusting the recent decline of 3-4%).
• YTD FY13 International coal prices are down ~19% as compared to FY12. Even after adjusting for the sharp depreciation in currency we see that international coal prices are down 7% in INR term. This could help contain the increase in freight cost.

5% diesel price hike factored in estimates, no material change in estimates- As far as our estimates are concerned, we had already built in a 5 % diesel price hike in our CY12/FY13 estimates and since the hike has come in Sept -12, the price increase is pretty much in line with our estimate. Remain positive on Grasim, ACC, Shree Cement & Madras Cement: Though the diesel price increase could possibly arrest the recent trend of softening in cost pressure for cement manufacturers, we believe even a moderate price hike post monsoons would be good enough to cover the impact of diesel price increase. We continue to prefer Grasim, ACC, Shree Cement & Madras Cement. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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