Cement: Profit pressure continues in Q4

Realisations still below pre-note-ban levels

During the December quarter, India’s leading cement players saw sales volumes come under stress. While ACC and Ambuja Cements saw sales volume decline eight-nine per cent year-on-year, UltraTech’s was down about two per cent. Among others, regional companies such as J K Cement reported a 5.8 per cent fall in sales volume. Among the exceptions were Shree Cement and J K Lakshmi Cement, where capacity expansions helped push up volumes, and south-based cement players such as India Cements and Ramco Cements, which saw project-driven demand driving sales.

The positive news is, the demand is recovering post note ban and helping realisations look up. The recent price hikes in most pockets of north India by about Rs 10-15 a 50 kg bag is encouraging. The prices in north India had remained flat during January 2017 compared to December 2016, leading to some concerns, though central, eastern and western regions had seen some positive price movement. Thus, recent price hikes in north and east have helped all India per bag cement price improve one per cent month-on-month to Rs 289 a bag, say analysts at Motilal Oswal Securities.

The bad news is, per bag realisations are still lower than Rs 298 in the September 2016 quarter (Rs 300 in October).

What’s more, while realisations are lagging, costs have surged. Pet coke prices have almost doubled to $85-90 a tonne from $48 a tonne in March 2016. Higher crude oil prices also suggest upward bias to freight costs. Thus, while lower costs in the first half of FY17 helped cement companies report better profitability, rising costs now are adding to challenges. Though companies have been working on improving operating efficiency, more will be required on fuel mix, reduction in lead distance, etc, to withstand the impact of higher fuel prices, say analysts.

Thus, profitability of most cement players will continue to remain under pressure. Analysts at Motilal Oswal Securities in their recent note also highlight that profitability for most cement players could be under pressure in March 2017 quarter (Q4) due to rising costs and no meaningful sequential increase in average realisation.

Volume growth, too, will be a challenge in Q4 given high base of March quarter, though some companies may still show uptick led by capacity expansion. But, given the expected increase in infra spending and focus on housing, analysts remain positive on the companies’ long-term prospects. 

Amid volatile demand and pricing, analysts at Centrum Broking remain positive on UltraTech (cost control and prudent capacity expansion), while among mid-caps they recommend JK Cement (steady white cement outlook, low capex led deleveraging) and also Ramco Cements and Deccan Cement.