Cement price hike sustains; South sees least increase: IIFL Capital Services

5 May 2022 , 12:07 PM

All-India average cement price is up by Rs25-30 per 50-kg bag or 8.1% month-on-month (MoM) in April 2022, racking-up its life-time high. The price increases taken by cement companies at month-beginning, to pass-on the cost inflation, have largely sustained. Dealers in select regions/states are suggesting a possibility of another Rs10-20 per 50-kg bag increase in May 2022.

The price increase trend differs across regions, with the North and Central region witnessing double-digit growth (~12% MoM), while prices in the West and East increased by 7-9% MoM. Attempts to raise prices in the South did not materialize, with prices remaining flat MoM (+1.1% MoM).

Dealer commentary on demand was subdued, with many dealers indicating a possible decline of 10-20% MoM (higher than the usual run-rate). Increasing construction cost along with labor shortages (harvesting period in select regions) has had an impact on volumes. Some traction is expected in May, given the pre-monsoon demand and headway in the infrastructure segment. A good harvest would also support rural demand.

Petcoke and imported coal prices have seen an increase of >50% since February 2022; even diesel prices are up 10% in Q1FY23 so far. In view of analysts at IIFL Capital Services, such sharp increases in input costs warrant an increase of Rs35-40 per 50-kg bag, for maintaining Q4 margins. As highlighted above, companies have already increased prices by Rs25-30 in April and are contemplating a further hike of Rs10-20 which, if materializes, would reduce the pressure on margins.

The concern, however, would be if this could impact cement demand (note that cement accounts for roughly 5% of the total construction cost).

Although we remain positive on the sector from the medium term perspective given the expected demand up-cycle, the stocks could react negatively in the near term, to the possible entry of an aggressive player (Holcim stake sale in Ambuja-ACC). Our sector-picks are ACC, Ambuja Cements, Dalmia Bharat, JK Lakshmi and UltraTech Cement.