Higher volumes, price hikes put cement firms on strong footing

Eight out of 10 cement majors saw their shares scale new highs on Friday, thus adding to the strong gains accrued over the past few months.

Cement is among the few sectors witnessing strong demand and pricing power. For instance, a rise in volumes, accompanied by a hike in cement prices, is likely to outweigh the impact of rising input costs for most companies in the March quarter (Q4), say analysts, who expect the sector to post strong profit growth.

Antique Stock Broking analysts, led by Prateek Kumar, said in an earnings’ note: “During Q4, the cement industry registered record volumes with overall growth accelerating to 22 per cent year-on-year (on a low base), on the back of 9 per cent YoY growth seen in Q3. For FY21, the sector could report modest growth compared to a 10-12 per cent YoY decline estimated at start of the year.”

A few of them operated at 100 per cent utilisation in Q4, and the pan-India utilisation would have picked up to 85-90 per cent, they added.

What makes it significant is that this optimism is expected to be carried over into FY22. CRISIL Ratings estimates volume growth at 13 per cent for this FY, aided by an expected revival in demand from infrastructure and urban housing sectors.

Operating profits, however, could moderate by Rs 200-250 per tonne owing to higher costs and lower net realisation, they believe.

“Cash accruals won’t be affected, though, as higher volumes will offset the impact of lower profit margins. Higher cash accruals will keep the ‘net debt to Ebitda’ ratio healthy at 1.4-1.5x in FY22, despite an increase in capital expenditure,” said Isha Chaudhary, director (research), CRISIL.

Margins have been under pressure owing to a rise in input costs. Power and fuel costs (25 per cent of total expenses) are likely to remain elevated because of a surge in pet coke prices (up 65 per cent since June to $125 per tonne in March 2021) and coal prices (up 45 per cent since June).

Freight and forwarding costs (30 per cent of total expenses) are also likely to be hit by higher diesel prices. 

“While realisations may remain little changed, an increase in input costs could lead to further sequential moderation of Rs 100-125 per tonne, resulting in a flat Ebitda per tonne in Q4 YoY,” said Khushbu Lakhotia, associate director at Ind-Ra.

This pressure has been partially passed on to consumers through price hikes in March, ranging from Rs 5-35 per 50-kg bag. As a result, the all-India average retail price surged Rs 16 per bag month-on-month (MoM) to Rs 363, the second-best in FY21 after April 2020’s increase of Rs 27 per bag, reports say.

The all-India average price rose 1 per cent quarter-on-quarter (QoQ) and nearly 5 per cent YoY in Q4, according to analysts’ estimates.

This is why some analysts believe that while margins could come in a tad lower sequentially, price hikes will help improve margins on a YoY basis.

Those at Motilal Oswal Securities say: “Operating leverage benefit (higher volumes), coupled with better realisations, should offset the impact of rising fuel costs, resulting in a 7 per cent YoY increase in estimated Ebitda per tonne to Rs 1,156 (for our coverage). Ebitda per tonne is, however, expected to drop marginally by 4 per cent sequentially thanks to higher fuel and freight costs.”

Elara’s channel checks suggest that in southern India, Maharashtra, Delhi, Rajasthan, Bihar, Madhya Pradesh, Uttar Pradesh, and West Bengal, firms may go in for another round of price hikes ranging fromRs 10-30 per bag, in April. If companies raise prices in April, these cost pressures could ease going ahead.

Most cement stocks have done well in 2021 so far, rallying 21 per cent to 56 per cent (see table), compared to a mere 3.9 per cent rise in the Sensex and 15-19 per cent gain in the mid-cap and small-cap indices on the BSE. 

As a result, valuations have turned pricey, thereby turning experts a bit cautious.

These stocks, according to G Chokkalingam, founder and CIO of Equinomics Research, have factored in most positives.

“Price hikes — the ones undertaken in March or the ones likely in April — have already been pencilled in. This apart, companies will continue to face input cost pressures, which they may not find easy to pass on to consumers. It is advisable to book profits now and buy again on dips,” he advises.