Beginning of new year may be disappointing for cement companies

The recent poor performance of cement stocks shows that investors are aware of these concerns. Stocks of major cement makers are down about 11-40% from their respective 52-week highs. The second half of the fiscal year is usually a seasonally strong one for the sector as construction activity picks up. However, this time the rebound in cement demand has not been impressive.

“The correction in cement stocks is mainly on account of no revival in post-festival demand. This is due to an extended monsoon in the south/east, sand mining issues, and labor shortage coupled with peak cement prices,” said Abhishek Lodhia, analyst, Yes Securities.

The sluggish demand means a rollback of the price hike in October and early November. Kotak’s latest cement dealers’ channel check shows that all-India cement prices have declined 4% in December, reverting to September 2021 levels. Cement prices have declined across sectors, which is likely to weigh on Q3 margins. Thereafter, investors will watch closely to see if cement demand revives in a meaningful way in the March quarter, leading to a correction in prices.

Kotak analysts said, “As we enter peak construction season, the sector should benefit from a combination of strong demand on account of in-season and pent-up demand, hike in prices and reduced cost in 4QFY22E.”

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International petroleum coke and coal prices have begun to decline from their peak, although they still remain high year-on-year. That said, since variable costs account for about 80% of the region’s total operating costs, moderation in the prices of these fuels augurs well for operational performance. In addition, cement manufacturers are trying to increase the share of alternative fuels/green energy to counter this volatility in fuel prices and reduce their carbon emissions.

In 2022, the pace of capacity addition remains something to be monitored. Here, a lot depends on how the demand moves. Analysts at ICICI Securities Ltd wrote in a report on December 24, “While there is a plan to add 80 million tonnes of capacity in FY22-24E, commissioning has a typical execution delay of 6-12 months which is even at the pace of demand.” Depends. Health benefits.”

Strong sales in the residential real estate sector offer a glimmer of hope for cement investors in the next year. Investors will keep a close watch on the extent of recovery in demand in the coming year.