Top listed cement companies' margins, profits lowest in a decade

The entry of Adani Group into cement has come at a tough time for the industry. The combined net profits of the country’s top listed cement companies declined to nearly a decadal low in the July-September 2022 quarter (Q2FY23).

The cement makers’ margins and earnings hit a record low in Q2FY23 due to a mix of high operating costs and lower than expected volume growth during the quarter.

The combined net profit of the country’s 10 biggest cement makers (adjusted for exceptional gains and losses), including UltraTech Cement, Shree Cement, and India Cement, besides ACC and Ambuja Cements, is Rs 1,030 crore in Q2FY23, down 71.8 per cent YoY in the quarter.

The industry’s combined quarterly earnings in Q2FY23 were the lowest since July-September 2013. (See charts)

ACC and Ambuja Cements, which Adani Group acquired from Franco-Swiss multinational Holcim earlier this year, performed even worse. The two companies reported combined net profits of Rs 76.41 crore on a standalone basis, down 91.4 per cent YoY and the lowest in the last 76 quarters. In comparison, the two companies had reported combined net profits of Rs 890.3 crore a year ago and Rs 1,270 crore in Q1FY23. 

On a consolidated basis, Ambuja Cements, which includes the numbers of ACC, reported an adjusted net profit of Rs 124.6 crore in Q2FY23, down 81.3 per cent YoY and the lowest since the October-December 2015 quarter. ACC became an Ambuja Cement subsidiary in August 2016.

The industry’s poor performance in the second quarter has prompted some analysts to lower the industry’s growth prospects.

“The volume of cement sales declined nearly 10 per cent in Q2FY23 over Q4FY22. Operating profit is the lowest since 2017 and nearly 40 per cent lower than the pre-Covid levels. With the languid performance, optimism over infrastructure and construction spending seems discordant,” said Dhananjay Sinha, director and head equity and strategy at Systematix Institutional Equity.

The sharp reversal in the cement makers’ earnings in Q2FY23 was largely due to an equally sharp decline in industry margins in the second quarter.

The combined operating or Ebitda (earnings before interest, tax, depreciation, and amortisation) margin of 10 cement companies in our sample declined to a record low of 11.2 per cent of the income on average in Q2FY23, the lowest in at least the last 67 quarters.

The quarterly data for the Business Standard common sample starts from the March 2006 quarter (Q4FY06). In comparison, the industry had reported an operating margin of 22.6 per cent on average in Q2Y22 and 18.5 per cent on average in Q1FY23.

ACC and Ambuja Cements did even worse and their combined operating margin declined to a record low of 5.2 per cent, the lowest since the two companies first began reporting quarterly results way back in March 1999.

“Ambuja Cements’ performance in Q2FY23 was impacted by continued cost pressures. EBITDA stood at around Rs 3 billion (against estimates of Rs 4.1 billion). EBITDA per tonne stood at Rs 433 (against estimated Rs 594) -- the lowest after Dec’ 04 as the operating expense per tonne was 2 per cent above our estimate due to a sharp rise in other expenses,” wrote analysts at Motilal Oswal Financial Services. The industry revenues, however, continue to grow at a comfortable pace aided by rise in sales realisation.

The combined net sales of the 10 cement makers in our sample were up 11.2 per cent YoY to Rs 34,700 crore in Q2FY23. ACC and Ambuja Cements on the other hand reported 10 per cent Y-o-Y growth in their combined net sales to Rs 7,581 crore in Q2FY23.

Many analysts are projecting an improvement in the margins of cement makers, including ACC and Ambuja Cements, and earnings from higher volumes and margin improvement.

“Adani Group targets becoming the largest and most efficient manufacturer of cement by 2030. We upgrade our capacity forecast for Ambuja + ACC to 120 million tonnes by CY27 from around 95 million tonnes previously,” write analysts at Emkay Global Financial Services.

But the question is whether this faster growth in capacity addition will come at the cost of margin and profit.