Cement firms’ earnings are at risk even as input costs soften

The diesel price cut of ₹2 per litre post a long gap is positive news for cement stocks. Roadways are a significant portion, over 50%, of cement makers’ transport mix, so change in diesel prices is crucial to gauge how freight costs will pan out.

Also, the costs of imported petroleum coke and coal, which are the key fuels to manufacture cement, have also softened from recent peaks. Their costs are likely to remain stable hereon.

The benefits of low-cost inventory have helped cement makers improve their operating margins in recent quarters. But in the backdrop of sustained pressure on cement prices, lower input costs may not be of much help to the earnings outlook.

Cement prices have dropped in March for the fifth month in a row. At an all-India level, the average price is estimated to have declined 5.2% quarter-to-quarter to ₹380 per 50 kg bag in Q4FY24, according to a Kotak Institutional Equities report on 18 March. The correction is driven by east and south markets.

Despite Q4 typically being a seasonally strong quarter for the sector due to full-swing construction activities, cement prices have continued to weaken.

But it’s not just about demand here. Elevated competition to garner market share amid massive capacity additions has weighigher hed on cement prices. Analysts also caution that companies take price cuts in March to meet their targets by pushing volumes.

The industry is set to add another 62 mtpa capacity in FY26, said an ICICI Securities report. Increased supply may keep prices volatile. So, the cut in diesel rates saves a mere ₹10-15 per tonne for the sector, and may go in vain, the brokerage said.

These factors could affect the sector’s operating margins, which may have peaked in Q3FY24. “We expect margins to contract in Q4FY24E on sequential basis, an aberration in seasonally strong Q4, led by unseasonal price cuts only partly offset by cost deflation and operating leverage,” the Kotak report said.

The cement sector is expected to close FY24 with high singledigit year-on-year demand growth of 8-9%. However, going into FY25, Q1 may be soft due to general elections, followed by seasonally weak monsoon in Q2, keeping volume growth muted. Therefore, the current scenario leaves the door open for downgrades of FY24 and FY25 earnings estimates, leading to further moderation in valuations.

So far in this calendar year, the stock performance of key listed companies like UltraTech Cement Ltd, ACC Ltd, Ambuja Cements Ltd, and Shree Cement Ltd, has been mixed. Industry bellwether UltraTech has seen its share price decline nearly 10% during this period.