After three price corrections, cement firms wait for hikes in Sept, Oct

Shree Cement, trading at highest valuations, is most vulnerable with demand under pressure and costs rising

After repeated corrections in cement prices over the past few months, all eyes are on the price hikes anticipated at the end of September or in early October. The same is crucial for profitability, earnings, and stock valuations of domestic cement manufacturers.

Recent analysts’ channel checks suggested the all-India average price per 50 kg bag of cement corrected 2 per cent in August, over the month of July. Binod Modi at Reliance Securities points out that cement prices have corrected for three consecutive months, with the eastern region witnessing the steepest price correction of 3.7 per cent month-over-month (MoM), followed by the central (down 2.1 per cent) and northern (down 1.9 per cent) regions.

While cement prices have corrected at the retail level, impacted by the monsoon season, prices in the non-trade (projects) segment, too, have dipped significantly, say analysts. Some improvement in labour availability though meant that cement demand improved in the non-trade segment. However, with companies trying to push cement volumes, there were steep price corrections in the non-trade segment.

At a time when demand remains muted, price improvement remains crucial to driving earnings of cement producers. Realisations, coupled with soft input prices, had helped cement manufacturers post decent profits in the June quarter. The data of 14 listed players, according to JM Financial, indicates that average realisation improved 1.7 per cent year-on-year (YoY) and 8.8 per cent sequential during the June quarter, led by improvement in prices, change in the segment mix, premium product sales, and aversion to dealer discount. All this meant that weighted average Ebitda per tonne recorded significant growth of 7 per cent YoY despite the high base and demand challenges. 

 

 

However, the September quarter should see equations change. Petcoke spot prices have surged to $85-90 a tonne from $70 in the June quarter (the contract price of companies was close to $55). Though the impact of higher petcoke prices will be felt in the ensuing quarter as old price contracts will prevail for some time, logistics costs for the companies are seen increasing. A 7-10 per cent spike in logistics costs is being anticipated for the September quarter by Kunal Shah of YES Securities, who feels per tonne profitability of cement producers may get impacted. Energy and logistics expenses are two major cost components for cement manufacturers and to mitigate cost pressures, price increases are necessary.

What's more, the demand outlook is not very strong at present. Though improvement in labour availability and the end of monsoon season are positives, there are still concerns on discretionary spends that may impact cement demand. According to CARE Ratings, growth in the housing segment, which forms about 68 per cent of cement demand (including low-cost housing), is likely to be impacted as new residential launches, sales, and new leasing will not be able to fully recover during FY21 and realtors will only be focusing on project completion and clearing of existing inventory.

Stocks of UltraTech Cement, Ambuja Cements, and ACC are down 6-10 per cent from August highs. Shree Cement has been on a downtrend since July. While it commands a premium being a cost-efficient cement producer, stretched valuations add to concerns. Trading at per tonne replacement cost of $173 (based on FY22 capacities), it is at a significant premium to UltraTech ($139), Ambuja ($109) and ACC ($71). 

High valuations also reflect stronger growth expectations, which may not be possible given the overall weak sector volumes scenario in the near term, say analysts. Credit Suisse, too, says that Shree Cement may be most vulnerable, given higher valuations of 39x FY22 price-to-earnings (PE) ratio and 15.5x FY22 enterprise value/Ebitda, versus UltraTech at a more reasonable FY22 PE of 23 and enterprise value/Ebitda of 11.8x.