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Cement sector may report healthy volumes amid price dip
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Despite it being a seasonally strong quarter, cement prices were affected by fierce competition among major companies aiming to increase their market share.
Cement demand remained strong in the January to March quarter (Q4FY24) amid a decline in prices.
However, the effect of lower prices was offset by favorable input costs.
Breaking down the demand trends:
The demand in January was weak due to weather conditions and pollution-related restrictions.
But the growth rebounded in February, while March emerged as the strongest month.
Volume growth is expected to recover in the fourth quarter, driven by heavy discounting from companies and increased construction activity towards the year’s end.
Analysts expect the demand at 8-9% in Q4, a big improvement on a sequential basis. For the year, the derived volume growth for the industry is likely to be around 9%.
On a regional basis, the Southern market underperformed, while the West as well as Central India were the best-performing regions.
Pricing trends in the fourth quarter:
Cement prices have steadily declined over the past five months following the increases in September and October 2023.
Therefore, the realisations in the fourth quarter are expected to decline by around 5% sequentially.
Despite it being a seasonally strong quarter, cement prices were affected by fierce competition among major companies aiming to increase their market share.
The most significant quarterly price drop was observed in East India, at roughly 8%, with other regions experiencing declines between 3-5%.
In March, spot prices for international coal and pet coke returned to December 2023 levels. Yet they remain 5-14% lower than the averages seen in the third and second quarters.
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The operating leverage and stable to decreasing variable costs on a quarter-over-quarter (QoQ) basis are expected to keep overall costs in check, with a projected decline of 4-6% year-over-year (YoY) and sequentially.
Brokerage firm Jefferies forecasts that the stocks it covers will experience an earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne reduction of approximately ₹110 on a sequential basis.
However, EBITDA per tonne is anticipated to increase by about ₹125 on a YoY basis.
Most companies are expected to see EBITDA per tonne growth, with ACC particularly well-positioned due to easing costs, volume growth from recent capacity additions, and relatively favorable valuations compared to its peers. This growth is also partly attributed to the low base effect from the previous year.
Among the larger peers, Jefferies expects the highest growth for Ambuja Cement at the consolidated level over last year, while UltraTech and Shree Cement are expected to grow by around 18 to 27% in terms of EBITDA.
In midcaps, Dalmia could potentially underperform with sub-10% growth, while JK Cement, and Birla Corp, could outperform with nearly 50% EBITDA growth.
What next?
Given the ongoing general election, a decrease in demand is possible. However, it’s crucial to monitor the extent of price increases, their market acceptance, and the expected recovery in demand later in the financial year (April to March 2024-25).
For more details, watch the accompanying video
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