The cement sector’s fight with input cost inflation has eased quite a bit. That’s because prices of key fuels needed to make cement, petroleum coke (petcoke) and coal have cooled off lately. Note that power and fuel (P&F) expenses form a large chunk of the sector’s variable cost. Jefferies India points out that the increase in cost per tonne for the sector over FY22-FY23 (estimated) was led by higher P&F cost.
Fortunately, this scenario is slated to improve. From its recent peak, international petcoke and coal prices have corrected by 40-45% and 60-65%, respectively, said a Jefferies report dated 19 March. Note that many cement companies were sitting on high-cost inventory until the December quarter (Q3FY23), so variable costs didn’t show a meaningful drop, keeping margins lacklustre. With the exhaustion of high-cost inventory, margin prospects should get better. If the falling trend in prices continues, then the benefits could accelerate in FY24.
“Easing cost of petcoke and coal is margin accretive for the cement sector. That said, the impact on earnings usually comes with a lag of a few months,” said Abhishek Lodhiya, lead analyst at Yes Securities Ltd. He reckons that the industry’s Ebitda/tonne for Q4FY23 is likely to improve by Rs150-200 per tonne sequentially. So, while FY24 earnings estimates may not see a cut owing to the drop in costs, a steep upward revision would depend on the pace of recovery in operating margins.
On the other hand, price hikes have disappointed. Cement prices across India have not seen a significant uptick so far in Q4. So, while margins may begin to show green shoots of recovery, realization growth could be muted. Cement demand is expected to be firm, driven by government spending on infrastructure and related projects, ahead of elections. Also, with Q1 being a seasonally strong quarter for the sector, cement prices can increase.
That said, sustenance of price hikes is crucial. Analysts note, in the chase for volumes, amid robust demand, cement companies may choose to compromise on realizations growth in the near-term. Secondly, at a time when input costs are easing, companies may not be able to take large quantum of price hikes.The performance of shares of key listed cement producers has been mixed so far in CY23. While shares of UltraTech Cement Ltd and Shree Cement Ltd have given positive returns, stocks of ACC Ltd and Ambuja Cements Ltd have slumped, hurt by weak market sentiment towards the Adani Group stocks.
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Article Source:Money Control
