Cement prices hiked, to remain firm in coming months to mitigate higher input costs

Channel checks by Anand Rathi Research revealed that cement companies had hiked prices across regions in March, raising prices in the North by ~Rs.20 per bag , in the South by ~Rs.20, in the East by ~Rs.15; in the West by ~Rs10 and in Central India by ~Rs15.

“While some regions may roll back prices to meet year-end targets, our channel check suggests dealers expect a further price hike in the first week of April to cover increasing costs,” Anand Rathi Research wrote in a report.

Cement demand remains firm with companies pushing volumes to meet year-end targets despite high costs, a labour shortage caused by the  Holi holiday and elections in some regions.

Recent price hikes not enough

While average pan-India prices are up 5 percent year-on year (YoY) in the fourth quarter, they would still likely fall short of the sharp input cost increase. “The current average fuel prices (which would impact in Q1FY23) are still ~30 percent higher than Q3FY22 fuel consumption rate necessitating further ~Rs40/bag (10 percent) QoQ price hike in Q1FY23 which remains a key trigger for the sector,” a report by ICICI Securities said.

Commodity prices

Prices of commodities like pet coke/coal surged in March to briefly touch a peak of $450/ton. They have since softened to September-October levels.

“Q3 results witnessed a significant impact of higher commodity prices (+Rs 450-500/ton impact on manufacturing costs vs Q1); we expect the current quarter to see a flattish to marginally higher trend on a sequential basis,” a report by JM Financial said.

Geopolitical tensions over Russia's saberattling and invasion of Ukraine resulted in a spike of 40 percent in the price of imported coal/petcoke compared to the levels of December. Domestic pet coke prices too are up by ~24 percent month-on-month in March.

Crude oil prices are up by more than 30 percent during January-March and the impact is already visible in a sudden increase in the domestic diesel price. “The variable costs are expected to remain elevated in the first half of 2022 and may pose downside risks to our earnings estimates for FY22-24 in the absence of cumulative Rs 50-60/bag price increase during first 6 months of 2022,” ICICI Securities said. 

In the past three years, the cement industry has hiked prices by an average Rs 40/bag in the first half.

Volumes

The dispatches through rail mode softened marginally in Feb’22 on a monthly basis. However, growth is seen picking up since then in Mar’22.

“Volumes transported through railways in Feb’22 reported a decline of 6 percent MoM (flattish YoY as demand moderated due to elections in major states). However, overall, transported volumes on a FY22-YTD basis (Apr-Feb’22) is higher by 17 percent on year”, said a report from JM Financial.

Outlook

Going by the trend in March, demand for cement is expected to remain firm owing to higher government spending on infrastructure and housing projects in the last two years left before the next general election.

“Cost increases may be transient – fuel price increases have mostly been reversed over 4-6 quarters historically (2011, 2014, 2019) and price increases are usually more durable and sustainable,” the ICICI Securities report said. “Sharp price increase of ~Rs40/bag in Apr’22 to mitigate cost escalations cannot be negated, in our view”.

 JM Financial concurs with ICICI Securities and believes the industry will hike prices in April as companies prioritise profitability at tje beginning of a new financial year.

Investment case

“While rising input costs pose downside risks to our / consensus earnings, risk-reward is turning favourable (post up to ~25% stock price correction over the past four months), in our view,” ICICI Securities said.

Risks of lower demand/prices and a sharp input cost escalations remain.

ICICI Securities recommends UltraTech Cement, Ambuja Cement and Shree Cements as its top picks but it also favors JK Cement and Ramco Cement Ltd.

Anand Rathi Research is betting on Birla Corp, Ramco Cement Ltd, Dalmia Bharat and Orient Cement.

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