Cement stocks riding high on hopes of higher demand, capex push

Price wars led by increasing capacities and aggressive competition may hit prospects

The cement industry continues to present several puzzles to investors. There’s consolidation going on, with current capacity in surplus to demand and the nation-wide entry of the Adani Group through its acquisitions of two key players.

At the same time, every major player is in capex mode and expanding capacity. The optimists point to the demand that will be created by the infrastructure thrust at both Centre and state level. The pessimists say demand is still weak in the medium-term and there are apprehensions that a price war could impact every company’s margins.

The fourth quarter of the 2022-23 financial year (Q4FY23) saw most companies instituting price hikes in January and February. However, those hikes were rolled back in March due to weakness in demand, especially in the east and south regions.

However, energy costs and transport costs also fell as coal and crude prices moderated. Hence, analysts are assuming that, while Q4 prices were flat, sequentially, compared to Q3, the lower costs should result in better margins. This could mean considerable increases in the earnings before interest, tax, depreciation and amortisation (Ebitda)/tonne realisations on the quarter-on-quarter (QoQ) basis.

Profit after tax (PAT), though, may contract due to higher costs of financing and high depreciation and amortisation. On a year-on-year (YoY) basis, due to fuel costs being elevated in comparison to Q4FY22, the chances are that both Ebitda and PAT will see contraction. The PAT contraction YoY could be in the double-digit zone with sequential PAT remaining more or less flat.

The March, 2023 weakness could be partly attributed to unseasonal rains and labour unavailability, as well as delayed payments for government projects. Despite that, Q4 volumes may have grown 9-10 per cent YoY and the same growth rate may be maintained in FY24, given the 2023-24 Budget with its higher allocations to infrastructure and construction (up 66 per cent YoY for Pradhan Mantri Awas Yojana, up 25 per cent YoY for roads and highways, and 27 per cent YoY to Jal Jeevan Mission).

In FY24, there’s reason to be positive since coal and fuel costs should continue to moderate, and infrastructure demand should push volumes. But price wars to try and gain market share are quite likely given the entry of a new, aggressive player and the capex across the industry.

In terms of price movements, the trends have been more or less bullish. ACC is a loser due to the Adani–Hindenburg effect but other cement majors such as Dalmia, Shree, JK, UltraTech, Grasim (which holds stakes in Ultratech and Aditya Birla Capital), are all net gainers in the past month and in the past year. The optimists seem to be holding onto cement stocks with a medium-term perspective.