Cement sector to stage demand, earnings recovery: Brokerages

The cooling of fuel costs and the Union government’s construction spree in the run-up to the 2024 general elections are expected to help margins and volumes.

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Demand is likely to revive in the cement sector in the coming months, along with an uptick in earnings, following a weak September quarter with decade-low operating margins because of higher energy prices due to the Russia-Ukraine conflict, said analysts.

Analysts believe the demand recovery will be led by the expected pre-general election spending by the government during the next fiscal. Also, energy prices have softened in the past few months, which will help reduce costs, analysts added.

Under the Pradhan Mantri Awas Yojana (PMAY)?Gramin, the government plans to construct 27.2 million houses before the 2024 general elections. Till date, 20.6 mn houses have been constructed (76 percent of the target), while another 4.2 mn have been sanctioned and are under construction. Under PMAY?Urban, 6.1 mn houses have been constructed (51 percent of the targeted 12 mn), while 34 percent of the houses are in various stages of construction. A total of 4.3 mn homes (2.4 mn rural and 1.9 mn) are yet to be sanctioned.

Business Standard reported on Monday that the government is looking to allocate an additional Rs 28000 crore for the flagship rural housing programme, PMAY-Gramin this fiscal year to ensure completion of the targeted dwellings before the next general election in 2024.

“Given the upcoming polls, we believe the government will accelerate the sanction process to achieve the target by Dec ’23. We believe that houses under construction along with those awaiting sanction will generate demand for 98 MT (metric tonne) of cement between FY23?25. Hence, we are positive on the sector’s long?term demand and pricing,” said Yes Securities in its 23 November note to investors.

“Having said that, we are cautiously positive on industry margins given the continued energy price volatility (pet coke moved up to $200 per tonne in Oct ’22, while African coal softened to $200 per tonne. However, Q3FY23 should gain from the softening of fuel prices over May?September ’22 as companies had stocked up on low?cost fuel inventory,” the Yes Securities report added.

According to Motilal Oswal Research, the pan-India average cement price increased 2 percent month-on-month in October ’22, driven by a 2-5 percent increase in prices in the south, east and west markets. In November ’22, cement manufacturers announced further price hikes of Rs 15-20 / bag across regions.

After remaining at an elevated level of $250-$350 / tonne (Richard Bay spot prices) between March-October ’22, imported coal prices have declined 19 percent in the last one month. Though petcoke prices have increased from mid-October ’22, the average price remains 29 percent lower than in the first quarter of this fiscal.

“The cement industry has been facing significant margin pressure due to the steep rise in global energy prices. However, recent cooling off in energy prices and the post monsoon demand pick-up appear to be a silver lining for the coming quarters,” said Ajay Kapur, CEO, Ambuja Cements, in its earnings release.

Weak September quarter

The weak September quarter was impacted by an extended monsoon in many parts of the country. A Moneycontrol analysis of 40 firms that have reported their earnings for the September quarter and for which comparable data is available for the preceding 25 quarters, showed that net profit dropped 90 percent over six years, while operating profit declined around 50 percent in that time.

This was the fourth consecutive quarter when the net profit and the operating profit declined year-on-year (YoY).

The sector’s operating profit margin for the quarter was 9.51 percent, down over 6 percent quarter-on-quarter (QoQ) and 12 percent YoY.

The net profit margin was down 5.7 percent QoQ and 9.5 percent YoY. The sharp fall in margins was due to a surge in the prices of fuel, coal, and other raw materials. Overall, costs jumped 28 percent YoY during the quarter. However, volume growth was robust at 10.3 percent YoY and a CAGR of 8 percent over the pre-pandemic base of the June ’20 quarter, according to Axis Capital.

“The past four quarters, particularly 2QFY23, were challenging for the cement sector with costs severely denting profitability. In 2Q, the aggregate ebitda / tonne halved YoY to Rs 585. Majority of the firms indicated that costs are likely to be flat / decline in 3QFY23. So far, the pricing trend for 3Q is encouraging / positive. Volume growth has been robust for the past two quarters and we expect the trend to continue. The earnings trend should improve from 3Q on the back of a lower base,’’ said Jefferies India in a note to investors on November 16.

Barring India Cements (up 39 percent) and Ambuja Cement (up 40 percent), all the cement stocks fell 12-25 percent between January-September ’22.

From 1 October till date, UltraTech Cement, Ambuja, ACC, Shree Cement, JK Cement, Dalmia Bharat, and Ramco Cements gained between 10-14 percent on the BSE. India Cement declined 11 percent during this period.

“We expect margins to improve in Q3FY23 (and further in Q4FY23) as fuel costs (particularly petcoke) have peaked, a fact substantiated by the firms as well in their earnings calls. Our preferred picks are UltraTech in the large-cap space and JK Cement among mid-caps,” said Axis Capital in its report.