Pain period likely over, cement makers set to deliver stronger in second half

Analysts expect the margin to recover third quarter onwards, driven by cost cool-off, rebound in cement prices and pick-up in construction activities

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The earnings season is approaching its end and most cement companies have come out with their results for the quarter ended September 2022. The performance has largely been in line with the expectations of experts, barring ACC Ltd, which lagged behind.

The second quarter of the fiscal has traditionally been a weak quarter for cement manufacturing companies with declining volumes due to a slowdown in construction activities as monsoon season peaks in.

Volume Growth

Volumes showed an upward trend for most of the companies as compared to the same period last year but, on a sequential basis, the volumes were expectedly lower.

The companies have reported volume growth above 10 percent during the Quarter on a YoY basis, except for ACC Ltd and Heidelberg Cement.

“The larger companies have been able to capture higher market share with double digit YoY volume growth” said Harsh Mittal, Analyst, ICICI Securities.

Shree Cements and Dalmia Bharat saw a healthy 18 and 14 percent growth in volumes. Sequentially, their volumes were down 1 and 7 percent. Ambuja Cement recorded an o-year growth of 12 percent in its volume, which declined 9 percent on-quarter, while India’s largest cement manufacturer, UltraTech Cement saw a 10 percent on-year growth and a 5 percent sequential decline its volumes.

Realisations

With the rise in inputs costs, the cement companies tried to pass-on the increase to the consumers and resorted to price hikes but most of them had to reverse the hikes as demand and volumes dipped. Still, on a YoY basis, the companies witnessed a marginal growth in their blended realizations.

The growth was the highest for Heidelberg Cement at 9 percent on-year, while that for UltraTech Cement stood at 5 percent. On a sequential basis, however, both the companies suffered a 4 percent decline in cement prices.

Ambuja Cements and ACC could increase their prices by 2 percent on-year, while the realisations for Dalmia Bharat increased by 1 percent. Realisations stayed flat for Shree Cement compared to last year but declined 10 percent on-quarter.

Revenues

The companies in general reported a low double-digit on-year growth in revenues propelled by higher volumes and realisations compared to the same period a year ago.

Heidelberg Cement was the only company that reported a 12 percent decline in its revenues compared to last while ACC Ltd could only achieve a 6 percent growth. Strong YoY growth in volumes for Shree Cement enabled it to achieve the highest revenue growth of 20 percent YoY among the major cement players. Sequentially, its revenues were down 9 percent due to a more than expected decline in realizations compared to the previous quarter.

UltraTech recorded a revenue growth of 16 percent on-year aided by a rise in both volumes and realisations. Revenues for other cement players grew by 13-15 percent year-on-year.

Operational Performance

During the quarter, the sector reeled under the pressure of rising power and fuel costs which resulted in a steep surge in operating costs.

“Rise in power and fuel cost, subdued demand and low pricing across various regions, had a significant impact on profitability of most of the cements companies during Q2FY23”, said Deepak Jasani, Head of Retail Research, HDFC Securities.

Power and fuel costs account for up to 30 percent of the manufacturing cost of cement manufacturers. “The cost pressures were seen affecting the smaller cement makers putting pressure on their margins while larger players were able to steer through the traditionally weak season for construction activities,” Anmol Das, Head of Research Teji Mandi.

The elevated costs of power, fuel as well as raw materials, severely dented the operating profit margins.

“The EBITDA margins have contracted by over 1000 (10 percent) basis points compared to last year, signifying the impact of higher costs”, said Uttam Kumar Srimal, Senior Research Analyst, Axis Securities.

Outlook

Experts believe that the worst period seems to be over for the sector and things can only look up from here. Since, cement is majorly a commodity used and sold entirely in domestic economy, hence experts believe that cement business will not be much impacted due to global recession fears, etc.

For H2FY23, experts expect the volume growth to remain robust in the range of 8-9 percent, driven by better demand on the back of higher government spending on infrastructure, low-cost and affordable housing, real estate demand, and demand emanating from the commercial and institutional segment.

“The demand will also get a lift as the general election of 2024 is fast approaching, and it has been observed that cement demand tends to be higher before the general election” added Srimal.

The domestic and international petcoke prices have fallen by ~30 and 40 percent, respectively, from their peaks in May-June 2022. Also, cement companies have now started sourcing cheaper petcoke from Russia and Venezuela vs. expensive South African/Australian coal/petcoke.

“We expect the margin to recover Q3 onwards, driven by cost cool-off, rebound in cement prices and pick-up in construction activities (post monsoon)”, added Jasani. With the increasing trend in prices, as cement demand is normally better in H2 and softening in commodity prices, experts expect improvement in margins of the cement companies and expect EBITDA/tonne to be higher by Rs 250-Rs 300 from the current levels in the second half.

“The outlook for the sector for H2FY23 remain positive with healthy demand environment expected to sustain along with improvement in EBITDA/tonne led by declining power & fuel costs and anticipated rise in cement prices”, said Ronald Siyoni, AVP Research, Sharekhan by BNP Paribas.

All larger companies remain committed with their expansion plans for the current decade showcasing confidence in secular long term demand growth and industry consolidation.

“We feel that ambitious capacity additions by large players (led by Ultratech and Ambuja-ACC) of ~100 million tonnes (MT) over the next ~4 years (from current 500 MT national cement capacity as estimated by IBEF) are going to have substantial fixed costs in the medium term and may lead to over-capacity in the sector (and hence a fall in realisation per cement bag)”, said Abhimanyu Kasliwal, AVP, Choice Equity Broking. “We thus expect consolidation to occur in the medium term as smaller players are not able to keep up”.

Investments in renewable energy and focus on ESG remain one of the key focus area in the growth journey of the sector.

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