Cement sector on solid growth path; lower costs should support margins

A look at the July-September quarter of financial year 2023-24 (Q2FY24) results of the 35 listed cement companies indicates that there has been a turnaround in the sector in the last 12 months, but profit generation in Q2FY24 is lower than in Q1FY24. This is partly due to seasonal effects, as the monsoon impacts construction activity negatively.

In aggregate, these 35 listed companies registered Rs 57,038 crore in net sales, which was 12.7 per cent growth year-on-year (Y-o-Y), but down 8.9 per cent sequentially. Declared Ebitda jumped 101 per cent Y-o-Y to Rs 9,940 crore, but was down 4.4 per cent quarter-on-quarter (Q-o-Q), and declared profit after tax (PAT) rose 600 per cent Y-o-Y to Rs 3,539 crore (down 11.5 per cent Q-o-Q). Power and energy costs declined with total expenses down 8 per cent Q-o-Q, despite a 9.8 per cent rise in interest costs. Taxes paid went up 341 per cent Y-o-Y. ACC saw a turnaround from losses a year ago, and Ambuja Cements saw PAT jump 7.5 times.

The average Ebitda margin for the cement sector was at 16 per cent, up sharply from 10-11 per cent a year ago. Softer fuel (pet coke) cost aided in 500-600bps Y-o-Y Ebitda-margin expansion on average for cement companies in Q2FY24. Logistic costs also softened by 4 per cent. Dry spells enabled relatively better volumes in the traditionally weak monsoon quarter. But realisations remained flat.

India’s largest cement maker, UltraTech saw an amazing 15.4 per cent volume expansion Y-o-Y, given the season and its scale. The Ramco Cements reported strong 39 per cent Y-o-Y volume growth followed by ACC (18.5 per cent) and UltraTech. Shree Cement and JK Lakshmi Cement reported 10 per cent Y-o-Y volume growth each. Most industry watchers believe volumes in the second half (H2) of 2023-24 will be stronger than the first half (H1).

Cement prices in October were up 5 per cent versus average Q2FY24, led by higher cement prices of 10 per cent in South and East India. A strong demand outlook combined with lower operating costs should lead to a good H2FY24.

UltraTech’s revised Phase 2 expansion of 24.4 million tonnes per annum (mtpa) is expected to begin in a phased manner by FY25 and FY26. Shree Cement’s capacity expansion plans, to reach 56 mtpa and 80 mtpa by FY24 and FY28 respectively, remain on track. Dalmia Cement is expected to achieve 56 mtpa cement capacity by FY24-end, including the assets of JP Associates. JK Lakshmi targets 30 mtpa capacity by 2030.

Capacity utilisation was around 68 per cent in FY23 and is estimated to touch 71-72 per cent in FY24. Demand is expected to outpace capacity expansions and utilisation could rise to around 73 per cent through the next two fiscal years.  

Average pan-India cement prices started inching up from September (up 3.3 per cent month-on-month or M-o-M) led by the average Rs 60 per bag (50 kg) price hike in East India. October saw a 3.5 per cent M-o-M jump, led by almost Rs 40 per bag price hike in South India. November has been flat, given the festive season and state elections. December should see a push in volumes. Cement companies are expected to receive the benefit of lower power & fuel costs in Q3FY24 and this gives headroom to cut prices to push volumes if necessary. This should lead to sequential improvement through H2.

Among big companies, Shree Cement (price-to-earnings, or P/E valuation of 40x) and UltraTech (31x) are expensive, with the latter probably still value for money. The ACC turnaround could push its P/E valuations down to an attractive 20x. Among mid-cap stocks, Dalmia Cement and JK Lakshmi Cement are expected to see sharp earnings growth by FY25 as capacity expansions come online.