Cement: March 2018 quarter impacted by higher costs, says Credit Suisse

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New Delhi | Published: March 19, 2018 2:04:13 AM

Weakness on pricing front; high supply pressure over next two years to limit margin expansion; need to stay cautious on sector.

Credit Suisse, Petcoke, higher import duty Spot Petcoke prices are 20% higher than Dec-2017 quarter (8% higher q-o-q on average).

Mar-2018 quarter is impacted by higher costs (Petcoke up 8% q-o-q and freight up 8-9% q-o-q) but prices are flattish q-o-q and thus impacting margins. Demand is not yet robust (weak infra and weak urban housing) and high supply pressure (JPA ramp-up and new capacities) is impacting prices. Players typically push high volumes in 2H of March and prices could further be impacted.

Spot Petcoke prices are 20% higher than Dec-2017 quarter (8% higher q-o-q on average). The increase is due to higher import duty and strong petcoke prices in international market. Full impact of Petcoke will be felt in Q1FY19 as prices increased from 1 March, 2018.

Truck rentals have also increased by 8-9% q-o-q due to (i) higher diesel prices, and (ii) higher utilisation due to stronger movement of agri products. Combined impact of higher freight and petcoke is `125/t q-o-q and on spot petcoke, the hit is Rs 220/t.
The supply pressure is high for sector over next two years at 5-6% CAGR and should limit meaningful increase in utilisation and delay the margin expansion, which the stocks are already factoring in. We stay cautious on the sector.

Sharp increase in Petcoke and freight costs in Q4FY18

Spot Petcoke prices are 20% higher than Dec-2017 quarter (8% higher q-o-q on average). The increase is due to higher import duty and strong petcoke prices in international market. The increase is despite the fact that petcoke is not allowed now in the power plants. Full impact of petcoke will be felt in Q1FY19 as prices increased by Rs 600/t from 1 March, 2018.

Truck rentals have also increased by 8-9% q-o-q due to (i) higher diesel prices, and (ii) higher utilisation due to stronger movement of agri-products. Combined impact of higher freight and petcoke is
`125/t q-o-q and on spot petcoke, the hit is `220/t. Typically, volumes are higher in the March quarter and this leads to better utilisation of fixed costs. This time, however, higher variable costs sequentially should only lead to marginal increase in Ebitda/t in March 2018 quarter.

Cement prices running weak (flattish q-o-q)

The demand is not yet robust and high supply pressure (JPA ramp-up + new capacities) is impacting prices. Cement prices have declined both in Feb-2018 and Mar-2018 on m-o-m basis. Players typically push high volumes in 2H of March and prices could further be impacted.

High supply pressure over next two years to check margin expansion

The supply pressure is high for the sector over the next two years at 5-6% CAGR and should limit meaningful increase in utilisation and delay the margin expansion, which the stocks are already factoring in. Additionally, there is supply pressure from ramp-up of Binani Cement and recently acquired assets by Dalmia (KalyanPur Cement and Murali) and these capacities together account for about 2% of system capacities. We stay cautious on the sector.

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