Cement prices under pressure; Cement companies' Q1 profits to be weak: IIFL Capital Services

14 Jun 2022 , 10:56 AM

·         All-India average cement price is down by ~Rs15 per 50-kg bag or 4% MoM as of mid-Jun 2022. The price increases taken by cement companies at beginning-quarter, to pass-on the cost inflation, gave way in mid-May, clearly highlighting pricing indiscipline among players.
 
·         Although prices have declined across regions in the last month, the quantum varies significantly, based on demand trend and competitive intensity. Although prices in the North were impacted due to lower demand, those in the East were hit by rising competition.
 
·         Last month saw the highest price decline in the North & East markets, each down 6%; the least decline was seen in the South & West, of less than 2%. While robust demand in the West supported prices, the South saw marginal price correction despite weak demand, as prices started correcting from mid-April. Average price in the central markets declined by 4.4% MoM.
 
·         Based on dealer commentary, other than seasonal factors such as lower labor availability during this period, the harsh summer this year also impacted demand. Higher construction cost at beginning-quarter too had a negative effect on demand; but dealers are now hopeful of demand recovery, given decline in construction costs, respite from the heat and a delayed monsoon.
 
·         Cost pressure sustains: Prices of petcoke and imported coal are up 30-55% QoQ, while diesel prices are up 7% QoQ in Q1FY23 so far. Despite cost pressures sustaining, cement prices have corrected in the last one month — this would impact the profitability of cement companies. Ebitda per tonne for the industry has been declining since Q1FY22; analysts at IIFL Capital Services expect cost pressures to sustain for another two quarters at least, until Q2FY23.
 
Sharp stock-price corrections in recent times partly factor-in this concern; however, analysts at IIFL Capital Services believe the sector can see some more correction in the near term, as we enter a lean season (i.e. the monsoons: Jun-Sep).

Cement price summary

Average price per 50-kg bag (Rs)	South	East	North	West	Central	All-India
Q1FY22	379	316	332	352	309	338
Q4FY22	350	303	335	352	313	331
Q1FY23 (QTD)	352	327	374	375	355	357
QoQ change (%)	0.4	8.0	11.5	6.6	13.4	7.8
YoY change (%)	(7.1)	3.6	12.6	6.5	14.7	5.6

Source: Industry, IIFL Research
QTD stands for quarter till date