Cement firms hope for better price after Q2 lows
After a forgettable second quarter when margins dipped to multi-quarter lows, respite is on the horizon for cement manufacturers as cost pressures ease. However, pickup in cement demand and sustenance of price hikes are key to earnings improvement, analysts said.
Prices of imported coal, which remained elevated at $250-350 a tonne between March and October, fell 19% in the last one month, suggests analysts’ data. Pet coke prices have inched up from mid-october, but analysts say it remains 29% below first-quarter prices on an average.
“We believe that the decline in coal and pet coke prices should help average cost reduction of at least ₹150 per tonne in 3QFY23,” analysts at Motilal Oswal Financial Services said in a report.
Analysts at Emkay Global Financial Services also expect the dip in fuel prices to provide
cost savings of at least ₹150-200 a tonne from the third quarter.
Still, cement prices and demand hold the key to earnings prospects of manufacturers. October saw some impact of the festive season and, hence, cement price improvement was limited. October demand was down 3-4% year-on-year and 7-8% month-on-month, but up
5% on a three-year compound annual growth rate, according to Motilal Oswal.
Cement prices improved in south, east and west but remained flat in north and central parts of India in October. Manufacturers have announced further price hikes of ₹15-20/bag across regions in November, said analysts; however, absorption of these price hikes by consumers needs to be monitored.
Analysts at Elara Securities India Pvt. Ltd in a November 25 report said, “Our interactions with dealers, sales executives, and C&F agents reveal that price sustainability remains a challenge and early November price hikes were followed by gradual rollbacks.” Hence, the pickup in cement prices and demand will remain key to near term prospects.
Demand data for December will be scrutinized, though analysts believe that the improved availability of labour after the end of the festive season should help. Prospects over the medium term also are seen in a positive light. Government infrastructure investments are also expected to drive cement demand, since calendar year 2024 will be an election year.
Analysts at Nirmal Bang Institutional Equities said cement demand may grow at 7.9% CAGR over FY22-25, aiding earnings growth, despite Q2 being a dismal quarter.
“2QFY23 aggregate Ebitda per tonne was the lowest in past 8 years at ₹585 (lower ₹590 YOY and ₹405 sequentially) versus estimated average at ₹650,” said analysts at Jefferies India Pvt. Ltd.
The miss was led by higher fuel costs and rising logistics costs that pulled up the overall costs of all cement manufacturers significantly. The logistics and energy costs remain key for profitability of cement manufacturers.
The average USA pet coke prices though declined to $192 a tonne from $267 a tonne; they were much higher than $96 a tonne in the year-ago quarter. Average diesel prices, too, were up 3% year-on-year.
The per tonne Ebitda of leading manufacturers as Ultratech Cement, ACC Ltd, Ambuja Cements and Shree Cement saw a decline of 34-96% year-onyear, as per analyst calculations.
The past four quarters and particularly 2QFY23 were challenging for the cement sector, with costs severely denting profitability, said analysts at Jefferies.