Weak demand, high cost to keep cement firms' EBITDA muted in Q2: Centrum

Q2FY22 is generally a weak quarter for cement makers due to monsoon, but the quarter under preview has also been affected by rising coal and pet coke prices and a transporters' strike

Drop in cement prices due to weak demand, coupled with input cost escalation, is expected to keep earnings before interest, tax, depreciation and amortisation (EBITDA) of the domestic cement industry muted for the September quarter, said brokerages.

Generally, July-September (Q2FY22) is a seasonally weak quarter for cement companies due to the monsoon, but the quarter under preview has been additionally affected by higher power and fuel cost as coal and pet coke prices surged dragging margins, said Centrum in its report.

Also, the erratic monsoon coupled with transporters’ strike hit the eastern region the most in Q2FY22 hurting volumes, it said.

The price of imported coal in Q2FY22 is up by 40 per quarter-on-quarter (QoQ) and 200 per cent year-on-year (YoY).

"We expect average volumes to be lower by 2-7 per cent sequentially and cement realisation to dip by 2-3 per cent sequentially on weak demand amid seasonality, with the sharpest drop in the South and the East," said Centrum.

However, JK Cement and UltraTech Cement are likely to outperform peers on all operating fronts, said a Philip Capital report.

While ACC is expected to be a laggard in the September quarter, other larger peers like Shree Cement, Dalmia Bharat and Ambuja Cements are expected to report mixed trends, it said. For ACC and Ambuja Cements July-September represents Q3 (CY2021) as they follow January-December accounting year.

 

In case of Ambuja Cements, volume growth is expected to be up 18 per cent YoY to 6.7 million tonnes (MT) led by low base and strong demand scenario in North, Gujarat and East markets. Realisation is expected to remain elevated at 2 per cent year-on-year and seasonal correction of 3 per cent sequentially, said Yes Securities.

The EBITDA of cement companies in our coverage is likely to decline by 17 per cent sequentially and 4 per cent year-on-year in the September quarter, said Emkay in its report.

Due to this, the average EBITDA per tonne for cement companies is also likely to decline 8 per cent year-on-year and 16 per cent sequentially to Rs 1,240, it said.

Average cement price is seen flat in the quarter under preview when compared sequentially. Region wise, north is up 2 per cent sequentially, East prices are down 2 per cent, while South/West/Central is flat, said IDBI Capital report.

Alongside, brokerages were of the view that though EBITDA per tonne is expected to drop in the September quarter, supply chain improvements would cushion the decline.

"We also continue to hear of several new initiatives by many players in various regions attempting to streamline their ground business efficiencies/supply-chain. This includes making better GST compliant credit notes, readjusting policies with regards transport and allied costs etc," said Philip Capital.

UltraTech Cement is undoubtedly the industry leader in supply-chain vigilance, as we see and this is helping them to remain ahead of peers directionally and structurally, said the report.

Going ahead, industry utilisations continue to remain below 70 per cent and it is unlikely utilisations will see any significant jump in near term, said brokerages.

Alongside, industry is announcing capex aggressively with an expectation of a very robust demand trend continuing in the future (long-term), they said.