Cement prices falls further; Q2 margins to decline sharply: IIFL Securities

13 Sept 2022 , 11:10 AM

IIFL Securities’ dealer checks provided the following insights:

·         All-India average cement price is down by Rs6 per 50-kg bag, or 1.9% MoM in August 2022. This is after prices declined by 2.5% MoM in July 2022. Consequently, Q2 FY23 (QTD) prices are down by Rs23/bag, or by 6.4% QoQ (so far). Historically, average price has fallen by 4-7% QoQ in Q2; however, given the cost pressures this time — the price decrease reflects increasing competitive intensity.
 
·         Prices have abated across regions, except for South, ranging from 1-5%. Higher reduction in prices was seen in East regions (4.5%), followed by West and North (around 2%) and Central (1%). Prices in South India were flat MoM.
 
·         Dealers shared that prices in the East and South have risen by 4% and 5%, respectively, in the first week of September. However, the same is unlikely to sustain as overall demand is not as strong.
 
·         Further, based on dealers’ commentary, demand in North and West has been relatively weaker compared to other regions. Progression of South-West monsoons, festival holidays and sand shortages in select states (Punjab and West Bengal). Going ahead, dealers expect volumes to improve - from September-end/October onwards — as monsoon recedes. Demand improvement may also allow companies to raise prices from Q3 onwards.
 
·         Although domestic petcoke prices are down 30% from June-end, the benefit of this would largely flow in Q3; as usually, companies carry fuel inventory ranging from 30-60 days. Thus, EBITDA per tonne is likely to see a meaningful decline in Q2 (current estimates of Rs200/t or ~20% of industry EBITDA/t) given lower prices and negative operating leverage (volumes are likely to decline QoQ).

However, with fuel prices correcting and cement volumes and prices likely to improve from Q3 onwards; Q2 is likely to be a bottoming quarter with industry profitability improving in H2. 

Cement price summary

Average price per 50-kg bag (Rs)	South	East	North	West	Central	All-India
Q2 FY22	365	294	330	348	305	328
Q1 FY23	351	324	370	372	351	354
Q2 FY22 (QTD)	337	301	338	357	323	331
QoQ change (%)	(3.9)	(7.0)	(8.6)	(4.2)	(8.2)	(6.4)
YoY change (%)	(7.8)	2.5	2.5	2.4	5.8	0.8

Source: Industry, IIFL Research