Cement – Q2FY22 preview: Quarter results are likely to be subdued

Demand expected to grow by 4% y-y; margins to fall sharply due to higher input costs and lower realisations

A truck stops at an Ultra Tech Ready Mix Concrete plant in Gurgaon, India, on Wednesday, Oct. 3, 2007. ACC Ltd., India's biggest cementmaker by capacity, said September sales rose 11 percent. The company sold 1.55 million tons of the building material last month, compared with 1.4 million tons in the same period a year earlier. Photographer: Adam Ferguson/Bloomberg News

After a strong recovery from COVID-19 second wave in Jun and Jul-21, cement demand was impacted by the monsoons in August. Our industry checks indicate that cement demand declined ~5-10% y-o-y in Sep-21, due to back-ended monsoon and flooding in several states. Cement demand was also impacted by a higher base in East and Central India (a sharp recovery after COVID-19 lockdowns in FY21), while the base was likely favourable in West and South India.

After three successive quarters of double-digit y-y growth, we expect cement demand for our large-cap coverage universe to increase 4% y-o-y (2-3% q-o-q decline). We forecast 6-7% y-o-y growth for UTCEM /ACEM, lower 3% y-o-y for ACC, while we expect a 3% decline for SRCM due to its higher presence in the East.

Pan-India cement prices decline 2% q-o-q: Pan-India cement prices were seasonally weaker, down 2% q-o-q on average during Jul-Sep’21. Cement companies across regions tried to raise prices in Sep-21, but with extended monsoon impacting demand, price hikes were rolled back. Cement price declines were steeper at 5%/3% q-o-q in East and South India, partly due to rollback of the sharp price hikes taken in Jun-21, while prices were more resilient in West, North, and Central India.

We expect a 1-2% q-o-q decline in blended realisations for our coverage universe. Furthermore, our industry checks indicate that cement prices have seen sharp hikes in Oct-21 with the industry looking to pass on the impact of the sharp increase in input costs. The sustainability of price hikes remains a key monitorable.

Expect energy and freight costs to inch up: Domestic pet-coke prices continued to rise and were up a further 22% q-o-q (+91% y-o-y), while international coal prices also rose sharply a further 35% q-q (+1.5x y-o-y) and have increased further to cross $200/t so far in Oct-21. Similarly, driven by higher Brent oil prices, diesel prices further increased 7% q-o-q (+18-22% y-o-y). We expect rising input costs to sharply increase energy and freight costs over the next few quarters.

Lower realisations, higher input costs to impact margins: With seasonally weaker realisations and a continued increase in input costs, we expect a 19-26% q-o-q decline in per unit Ebitda for our coverage universe. With marginally lower volumes q-o-q, we estimate a 21-27% q-o-q decline in Ebitda and 28-38% q-o-q decline in PAT. We expect cement demand to pick up post the festive period (early Nov’21).

But, with input costs continuing their uptrend, cement price hikes and its sustainability remain the key. We prefer UTCEM (Buy) in the large-cap cement space and have a Reduce rating on both SRCM and ACEM, primarily on their steep valuations.

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