Investors should focus on larger cement players as outlook improves

After  some enforced slowdown in offtake during April-May 2024 due to elections, the cement sector is looking at a possible demand rebound which may help it to push up prices.

The April’24 offtake was muted while May’24 saw some improvement with a likely 5-6 per cent rise in demand month-on-month (MoM).

In June, some price hikes seem to have been taken, which suggests more sustained improvement in demand.

However, averaged across April-June 2024 (till date), prices in Q1FY25 will be flat with respect to Q4FY24.

Raw material costs have however eased off with petcoke prices down.

Earlier attempts to hike prices in Q4FY24 had failed to take off given slow demand.

Apart from a possible rebound in demand as postponed government tenders are rolled out, there are seasonal considerations with the monsoon due to arrive within a few weeks.

The new government has already announced the construction of additional 30 million houses under the Pradhan Mantri Awas Yojana (PMAY) which will be a positive for the cement industry.

On a M0M basis, domestic petcoke price declined 6 per cent in June’24 and imported petcoke prices were down 3 per cent, while imported South African coal prices remained flat.

These are spot prices which will impact raw material costs with a lag due to shipping/ transit/ inventory held, etc.

The full benefits of lower cost will probably be felt from Q3FY25 onwards. Industry expects fuel co­sts will be lower for several quarters if inventory is created at these prices or lower.

Cement demand should improve with the focus on affordable housing, and strong demand from commercial real estate, and possible pick-up in industrial capex.

The new NDA government is also likely to continue with the infra focus on road network, rail & metro connectivity, and greenfield/ brownfield airport construction.

The Budget is eagerly awaited.

The cement industry features capacity expansion by every major player in anticipation of future demand.

This has also led to a situation where companies are fighting hard for market share and therefore, less focussed on margins and realisations.

Demand is anticipated to pick up by around 5-6 per cent year-on-year (YoY) in H1FY25 and pick up by 8-9 per cent YoY in H2FY25.

Due to the seasonal factors, Q4FY24 was quite strong with better Ebitda per tonne and volumes up 13 per cent YoY. Power & Fuel (P&F) costs dipped in Q4FY24 contributing to better Ebitda per tonne and as noted above, the P&F costs are still trending down.

However, stiff competition and the battle for market-share meant that price hikes were minimal and that competitive element could also put a ceiling on realisations per tonne in H1FY25 although most companies have taken prices in June.

Ongoing capex will restrict free cash flows for a while.

In this situation, scale, strong balance sheets and a national footprint will be crucial factors in driving outperformance.

The top 5 companies now hold an estimated 72 per cent market-share (after Q4FY24) and further concentration is likely, given the capex trends.

A focus on the larger players will probably be the best strategy for investors.

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