Demand recovery crucial to fill up cracks in cement sector

Dec qtr results were disappointing as costs escalated and volumes came under pressure

The cement industry presents an intriguing picture. The Q3 (Oct-Dec 2021) saw disappointing results from most companies. This was due to a combination of several factors. Base effects are wearing off since Oct-Dec 2020 saw some recovery. Operating costs escalated sharply especially because power / energy costs shot up. The Q4 (Jan-Mar 2022) may see some demand bounce and that would allow companies to raise prices and pass on costs to some extent. But inflation is significant and will also impact costs.

More importantly, demand recovery next fiscal will be critical. If we ignore the obvious risks of another severe wave of the pandemic, construction should be driven by a Budget that makes it clear the government will encourage an infrastructure push. That should feed into better cement offtake. However, the Budget also cuts allocation for MNREGA, which may impact rural demand negatively, and in turn, this could hurt housing demand, especially in the affordable segment.

Inflation is likely to remain elevated, despite the RBI’s hope it will be transitory. Energy prices are expected to continue ruling high, making life difficult since cement production is a very power-intensive process and transportation is also a serious cost. There are hopes however, that pet-coke and coal prices are likely to moderate.  

There were construction bans in the Delhi NCR region during Q3, and heavy rains in the South, while there were labour shortages in Eastern India and sand-mining slowed down in UP. Demand fell sharply in the South and East, with some pickup in late December and in January 2022. As a result of high costs and weak demand, many companies are now holding high inventories. However some of the factors causing inflation could be transitory.

For example, India Cements which is primarily a Southern player, saw 11 per cent YoY drop in volumes in Q3, while ACC (which has a national presence) saw 3 per cent volume drop YoY and UltraTech (market leader nationally) had a similar 3 per cent drop in Q3 volumes. EBIDTA fell much more at these companies with India Cements seeing 52 per cent drop in operating profits YoY while ACC saw 20 per cent drop and UltraTech EBITDA was down 22 per cent.

Cement manufacturers hiked prices in October but were forced to roll back in November as demand weakened. Given demand recovery in January, there’s a chance that cement prices can be hiked in Q4, 2021-22 and higher prices can be sustained in FY 2022-23. Month-on-month, cement prices across India were up 3 per cent on average in Jan 2022, versus Dec 2021. Despite the disappointing Q3, analysts expect cement consumption would rise by 15 per cent this fiscal over 2020-21.

All cement stocks have underperformed in the past month or so. While the Nifty is down 5.5 per cent in the last month, the Nifty Infra Index is down 6.5 per cent. There are several cement stocks belonging to the Infra Index. These include ACC (down 5.9 per cent), Ambuja Cements (down 11.6 per cent), Ramco Cements (down 15.5 per cent), Shree Cement (down 9.9 per cent) and UltraTech (down 8.8 per cent). Investors have become cautious about the sector.