Cement: Prices fall, but cost tailwinds emerge
Cement prices in the country continued to decline on partial rollbacks across regional markets. In December, average trade prices pan-India moderated by ₹10 per bag, showed a dealers’ channel check by Nomura Financial Advisory and Securities (India).
One cement bag weighs 50 kilograms. The trade segment is where cement is sold by the manufacturer to the dealers.
Region wise, this price fall was led by south and east with ₹16 and ₹15 per bag, respectively. The correction in these markets was expected by dealers as demand remained subdued, achieving volume targets, said the Nomura report dated 8 December.
Despite the recent softening, trade prices have remained strong on a sequential basis, up ₹13 per bag versus the September quarter (Q2FY24) average. But pricing pressure indicates that the chase for market share gains is getting stiff amid heightened competitive intensity.
In this backdrop, easing input costs provides a breather to investors in shares of cement companies. Elevated cost of key fuels, coal and petroleum coke (petcoke), had triggered fears of inflation making a comeback. But these fears have eased.
According to a Jefferies India report on 13 December, the trend of higher input costs has reversed in the past one-two months. The cost of international coal is down around 15-20% after rallying 50%+ from the recent bottom, while petcoke cost has eased much lesser by 5-7% after rallying around 30% from the bottom, said the Jefferies report. This should translate into some operating cost savings for cement manufacturers, boosting the sector’s near-term profitability prospects. After all, power and fuel costs are estimated to constitute 30-35% of the sector’s total production cost.
“The average fuel consumption cost stood at ₹1.9 per kcal for our coverage companies (versus spot/ last six-month average of ₹1.6 per kcal). The industry thus expects to witness an input cost reduction of ₹50-100 per tonne in H2FY24,” Antique Stock Broking said in a report on 12 December.
Besides, operating leverage is expected to result in further benefits of ₹80-100 per tonne in H2FY24, it added.
On the flipside, the impact of re-imposition of busy season surcharge on rail freight, will have to be watched out for in Q3FY24 earnings performance.
For now, improving profitability is likely to give the sector’s FY24/FY25 earnings outlook a fillip, at least to some extent. But demand and pricing trends remain crucial. The ongoing consolidation theme and thrust of large companies on inorganic growth along with planned expansions, point to more supply coming-in as capacities ramp-up. So, demand growth has to be solid to absorb new supply.
Note that cement stocks have been in focus ahead of the 2024 general elections as government-led infrastructure spending is seen boosting cement demand. Aggressive capacity addition targets by major cement makers have also aided investors sentiments towards the stocks.
For instance, shares of UltraTech Cement Ltd, Dalmia Bharat Ltd and Shree Cements Ltd have rallied by 22-42% so far in this calendar year, handsomely beating benchmark index Nifty50.
Further, the stocks of select mid and small-sized cement makers have also seen a positive rub-off on increased mergers and acquisitions activity in the sector.
But caution is warranted here. Valuations of key cement companies are no longer cheap. Plus, there are worries that election-led demand could taper down once the event is out of way. This could mean further pricing pressure. In that scenario, the fight for volumes could weigh on the sector’s realizations growth outlook. To be sure, robust construction activity in the real estate sector, an important demand driver, is expected to support cement demand, but in the wake of capacity additions, there is not much clarity on the pace of absorption going ahead.
