Cement demand showed some recovery in April but got severely hit in May by covid-led local restrictions. Dealers channel checks by brokers showed that cement demand saw some recovery in June. This was aided by demand from government infrastructure projects offsetting the weakness in the retail segment. Still, it was not adequate to compensate for the loss of sales in the previous months.
Analysts at HDFC Securities Ltd said sales volume in Q1FY22 fell around 20% sequentially as against the usual trend of a 5-10% fall. As a result, the sector’s utilization declined to around 72%. This is the second lowest for a June quarter in the past many years, said the domestic brokerage house.
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So, cement companies are expected to see a sequential decline in sales volume growth in the June quarter. Compared to the year-ago levels, sales volumes could see an improvement of 40-45%, but since that would be aided by a favourable base, analysts cautioned against getting carried away by it.
Input cost inflation continues to remain a dampener for the sector’s operating performance. Higher energy and freight costs would keep variable costs for cement companies elevated in the June quarter. Even though costs of petroleum coke have stabilized at $125 per tonne in Q1FY22, they are up around 14% sequentially. International coal prices, too, are up 15% on a quarter-on-quarter (q-o-q) basis.
In this gloom, investors in cement stocks can seek some solace from the upward trend in cement prices. After raising prices in March, cement companies took another round of price hikes in June. Channel check by Kotak Institutional Equities showed cement prices at an all-India level stood at ₹376 per 50kg bag in June. “Pan-India cement prices at retail level remained strong (+5% q-o-q) in 1QFY22 led by higher exit prices in 4QFY21 and price hikes in a few regions during the quarter. East, west and south witnessed the sharpest increase (+5-9% q-o-q),” the domestic brokerage house said in a report on 6 July.
So, analysts at Kotak expect higher prices to offset higher variable costs and margins to remain largely stable with just a 2-3% sequential decline.
Furthermore, change in fuel mix by reducing dependence on petcoke and higher reliance on alternative fuels could also contain margin compression. Large cement makers started tweaking their fuel mix more cost-effective March quarter onwards. However, mid- and small-sized firms are expected to follow suit from the June quarter.
Meanwhile, in spite of weak demand, firm cement prices have kept investors’ sentiment towards cement stocks buoyant. Shares of key cement makers such as UltraTech Cement Ltd, ACC Ltd and Ambuja Cement Ltd hit their respective new 52-week highs in July. Analysts said the positives of price hikes are factored in and it remains to be seen if cement prices are rolled back on a prolonged delay in demand recovery.
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