Cement companies exit the fourth quarter with flat prices, margins remain at risk of decline

“Historically, cement prices increase 3% quarter-over-quarter (qoq) in 4Q; While 4QFY22 prices, up 1% qoq so far, are mainly led by the former and struggling to rise despite strong seasonality,” the report added.

A sluggish price trend is a bad news in the backdrop of heavy cost inflation that the sector is grappling with. The cost of major input petroleum coke and imported coal is still at an elevated level. Moreover, with the expected hike in petrol and diesel prices, the freight cost of the region may also increase. Hence, investors should be prepared for poor operating performance of cement makers in the March quarter.

“Our analysis of the last two input cost inflation cycles (FY11-12 and FY18-19) shows that the cost hike was passed within 3-4 quarters. However, this time considering the steep rise in input prices , near- in our view, it may take longer,” analysts at Emkay Global Financial Services Ltd said in a report on February 16.

Since power and fuel costs contribute around 25-30% of the total operating cost of the cement industry, there could be a sharp drop on operating margins, now that the price hikes have not been as expected and that too in a seasonally strong quarter. In. This has put the stocks of major cement makers under pressure over the past few weeks. Fears of further fall in earnings have dampened investor sentiment towards the sector.

According to analysts at Kotak Institutional Equities, weak demand in 4QFY22 is the key reason behind stable prices and margins will remain under pressure in 1HFY23 due to rising commodity costs amid geopolitical tensions. “We see a significant downside risk in consensus estimates,” the domestic brokerage house cautioned.