Cement prices correct, despite cost pressures, in a seasonally weak quarter: IIFL Capital Services

12 Aug 2022 , 11:30 AM

• All-India average cement prices are down by Rs10 per 50-kg bag or 2.8% MoM, in July 2022. More importantly, the average price is down by Rs20 per 50-kg bag or 5.7% compared to Q1FY23 average price. This is important as most companies in their Q1FY23 call have suggested the cost pressures are likely to sustain at least until Q2FY23. Thus, any price decline will directly impact margins.

 

• Although prices have declined across regions, the quantum varies significantly based on the demand trend and competition intensity. The highest decline is seen in the Central and Northern markets, followed by South and East (average decline in East is lower due to sharp increase in non-trade prices in Odisha). West saw the least price decline in July. In August, so far, prices have declined only in the East markets — average price is down 2% versus July-end price.

 

• Based on dealers’ commentary, demand has moderated throughout India with the pick-up in monsoons, barring markets in North India and Tamil Nadu. Dealers expect volumes to further decline in August due to peak monsoon as well as multiple festive holidays. Thus, companies would be under pressure to further cut prices.

 

• Based on the companies that have reported Q1 results so far, analysts at IIFL Capital Services note that the sector EBITDA per ton has declined by Rs30/t or 3% QoQ — the impact of Rs300-350/t increase in operating costs is partly offset by 5.5% QoQ or Rs300/t increase in realizations. However, so far in Q2FY23, cement prices are down by Rs20/t. Assuming cost pressures remain unchanged, sector EBITDA/t can fall by another Rs200-250 to Rs750-800/t in Q2FY23.

 

• With petcoke and international coal prices now starting to correct, analysts at IIFL Capital Services expect cost pressures to ease off from Q3 onwards. Also, as monsoon recedes, the demand should recover allowing companies to increase cement prices. Hence, analysts at IIFL Capital Services believe profitability of cement companies will bottom-out in Q2. In this regard, any correction in stock prices over the next two months could be an opportunity to buy.

 
IIFL Capital Services’ top picks in the sector are: UltraTech Cement, ACC, Dalmia Bharat, JK Cement and JK Lakshmi.