Outlook for Cement companies remains strong; analysts bullish about sector

Three top players, UltraTech, Ambuja and ACC post a robust performance in June quarter

Cement shares appear to be in a strong bull-run. The share prices of the cement majors have comfortably outrun the Nifty over the past month and over the past year as well. The industry’s fortunes are linked to activity in the realty industry and to construction, in more general terms.

Since construction is mainly driven by infrastructure activity, this is a key factor. The 2021-22 Budget has a strong infrastructure focus and, despite the lockdowns, project activity is up. The industry has a natural defence against imports because cement is hard to transport by sea.

The year-on-year (YoY) results of cement firms will be boosted by a low base effect due to lockdowns in April-June 2020. ACC (with a Jan-Dec financial year) reported a jump in PAT to Rs 569 crore in April-June 2021 (with Rs 38 crore to Exceptional Items) versus Rs 269 crore in the same period a year ago.

ACC’s revenue for the April-June period jumped over 49 per cent to Rs 3,884 crore versus Rs 2,602 crore in Q2 CY20. In the Jan-Mar 2021 quarter however, the revenues were up to Rs 4,292 crore, with PAT registered at Rs 557 crore. PBDIT in April-June 2021 was Rs 874 crore, versus Rs 525 crore YoY and Rs 859 crore QoQ.

UltraTech Cement’s reported consolidated profit more than doubled to Rs 1,700 crore in April-June (Q1) period against Rs 793 crore YoY, which beat expectations. Revenue from operations jumped 54 per cent year-on-year (YoY) to Rs 11,830 crore in Q1FY22 against Rs 7,671 crore in Q1’FY21. PBDIT rose 51 per cent YoY to Rs 3,308 crore versus Rs 2,078 crore YoY. UltraTech also said that its capital expenditure plan will augment its capacity to 136.25 million tonne by end of 2022-23. QoQ, the revenues fell versus Jan-Mar 2021, when net sales were at Rs 13,966 crore, while PBDIT was at Rs 3,513 crore. Production costs were up 10 per cent mainly on account of higher fuel prices. In its advisories, it warned against the negative impact of a possible third wave.

Ambuja Cements reported Consolidated Operating Revenues of Rs 6,978 crore in Apr-June 2021, compared to Rs 7,714 crore (QoQ) during Jan-Mar 2021 and Rs 4,644 crore in Apr-Jun 2020. The company posted PAT of Rs 1,161 crore in April-June, 2021 versus PAT of Rs 1,228 crore for Jan-Mar 2021 (QoQ) and PAT of Rs 593 crore in the year-ago period. Ebitda was Rs 1,904 crore for April-June, 2021 versus Rs 1,935 crore for Jan-March, 2021 (QoQ) and Rs 1,233 crore over the year-ago period.

All three companies saw substantial reduction in inventories which is a good signal and stable financing costs, which can be attributed to lower interest costs as well as faster offtake reducing working capital needs. However, power and fuel costs are up substantially – this is a serious input for any cement manufacturer. 

The results have beaten the street in terms of PAT / Earnings although revenue expectations may have been a bit higher. Higher input prices due to rising fuel prices is one area of concern, the other apprehension is of course, a Third Wave.

Cement is a commodity, with price and distribution being more critical than branding, and other cement manufacturers have also seen rising share prices. Most analysts remain bullish about the sector and the technical trend is up.