Covid-19 impact: Recovery for cement erratic, but margins may hold

The cement industry is expected to end the current financial year with a volume decline, but price discipline and reduction in costs might hold most companies in good stead.

Cement companies have seen a partial reversal of prices hikes announced in May. 

A combination of reduced overhead expenses and cut in fuel cost could help shield margins. 

“Margins should not be a worry for cement companies this year. Volumes may be low, but they have maintained a high Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne, helped by sharp reduction in overheads and lower fuel costs,” said Nitin Bhasin, head of research — institutional equities, at Ambit Capital.

Soon after the lockdown was eased for industries in May, all cement markets in India saw price hikes of Rs 10-70 a bag, depending on the regional market, some of these hikes have seen a partial roll-back. For instance, price for a cement bag in Mumbai in August was Rs 350, down from Rs 360 in June and July. 

“There has been some reversal in the price hikes taken in May, but not significant,” Bhasin added.

India’s cement demand is on the path to recovery, but local lockdowns have made it erratic.

H M Bangur, managing director for Shree Cement, pegs industry utilisation at 70 per cent. Most are optimistic of better demand in the October-March period. “Demand for October 2020 to March 2021 period should be the same as last year. As there was lockdown starting March, expectation was a decline of 10 per cent year-on-year for FY21, but now demand destruction may be lower,” Bangur said. Demand was estimated to grow 7-8 per cent before Covid-19 hit.

Mahendra Singhi, president for Cement Manufacturers Association (CMA), attributes the recovery to rural demand, which includes rural housing and government projects. Urban demand, he said, is also improving.

“We saw a demand recovery in many states in the last two months. However, all India demand for the second quarter would see a decline of one to three per cent year-on-year. There has been a month-on-month improvement, barring states that were hit due to rains,” Singhi said.

Singhi added that the third quarter needs to grow at 4-5 per cent and more than 7 per cent in the fourth quarter to ensure the demand decline remains in 10-15 per cent range for the year. 

“One major risk to demand is the non-availability of funds with state governments, causing any delay in payments or capex,” he warned.

Despite weak demand, margins of cement companies in the first quarter were high. 

India Ratings in a recent report said, “Despite a record lockdown-induced volume decline of 30 per cent, the aggregate Ebitda/tonne of listed cement companies hit a historical high of Rs 1,325 per tonne in the June quarter on the back of reduced costs.”

Some cement companies have also shifted back to coal as a fuel source against using pet coke. Industry executives attributed the shift to cost efficiencies, but do not expect it to be a permanent shift. They added, a temporary unavailability of pet coke due to lower utilisation at refineries, coupled with logistic issues may have prompted the change in fuel source.

At a policy level, Singhi added the government is also looking to encourage cement exports. 

“The government is exploring how exports can be increased. Support from the government, incentives and better infrastructure facilities at the port are needed to make this work,” he said.