As challenges ease, cement firms remain bullish

The March quarter (Q4) of the ongoing financial year (FY23) may see cement companies report better financial numbers as input costs ease, pricing action resumes, and cement demand remains firm.

While companies have been cautiously optimistic about their outlook, analysts and sector experts remain bullish.

In its latest report on the cement sector, brokerage IDBI Capital said that it expected earnings before interest, tax, depreciation, and amortisation (Ebitda) per tonne for cement companies to improve by Rs 200-300 sequentially in Q4.

This is likely to be aided by a 10 per cent year-on-year (YoY) volume growth in the March quarter, a 10 per cent sequential decline in fuel costs and a 1-4 per cent sequential price hike during the period, the brokerage house said.

On average, Ebitda per tonne for cement companies in Q3, according to experts, was Rs 760-780, a decline of Rs 120-130 from a year ago.

Sequentially, there was an improvement of Rs 180-190 in Ebitda per tonne for cement firms in Q3, this metric, followed closely by analysts, is expected to grow in Q4.

In a report last week, research and ratings agency Crisil said coal and petroleum coke prices, which are used to make cement, were easing, which would support the operating margins of companies.

“After hitting a decadal low of sub-10 per cent in the September quarter of FY23, the industry’s margin improved by 390 basis points in the December quarter to 13.8 per cent with the softening of fuel prices.

"A meaningful recovery in operating margins of companies will depend on the sustained softening of fuel prices,” said Koustav Majumdar, associate director, research, Crisil.

Power and fuel costs constitute a third (30-35 per cent) of the production cost for cement companies, said Majumdar.

Though the Russia-Ukraine war aggravated supply-side concerns last year, those issues have eased now.

From a demand perspective, the January-March period is considered to be the strongest for cement companies, owing to a pick-up in construction activities.

After a gap of 3-4 months, top cement players last week raised prices by Rs 5-15 per 50-kg bag across regions, which is expected to improve value growth for companies.

The impact of this price hike, according to experts, could determine the next round of price increases by companies in the new financial year.

“The past few days have seen the chatter on price hikes coming back, though the trend needs to be monitored,” said Prateek Kumar, research analyst at Jefferies.

“This may also suggest the intent of companies to increase prices in April.”

According to both Crisil and CARE Advisory, the sector may see its third straight year of growth in cement production in FY24 to 425 million tonnes (mt), led by a 7-9 per cent volume growth during the period.

This may prompt firms to increase prices next year, as the outlook remains strong for the market.

As far as FY23 goes, the industry may close the year with production of around 390 mt, growth of 9-10 per cent over the previous year.

Though FY22 remains the best year for the industry over the past few years, growth, experts said, of 20.27 per cent over the previous year (296 mt in FY21) was led by a low base effect.

“The cement industry is expected to see a continued uptrend in volume growth in the near term.

"This is owing to renewed demand in the housing and infrastructure segments, coupled with the government's continued focus on infrastructure development in light of Central Elections in 2024,” said Tanvi Shah, director, CARE Advisory.