New Delhi : Cement demand picks up in June quarter, peak season for construction before monsoon, a good news for manufacturers battling high cost of production.
According to data from JM Financial Institutional Equities, the volume of cement transported by rail in May 2022 was 2% higher than in April, and 30% higher than a year ago. Last year’s lower base due to the lockdown is also likely to help support year-on-year growth.
Volumes in May were also 3% higher than average volumes in January-February 2022, although March volumes are lumpy and not comparable. The quantity of cement is likely to increase nicely in May as well.
Volume growth can drive operating leverage at a time when cost headwinds remain high. However, the monsoon season may limit volume growth in the coming months as construction activities slow down during the rainy season.
Analysts already have a cautious outlook on the cement sector, given the cost adverse conditions arising from higher fuel (coal and pet coke) costs and higher logistics costs. The March quarter and FY22 earnings testify. India’s largest cement maker UltraTech saw a 18% increase in consolidated revenue in FY12, led by 9% and 8% growth in sales volume and mixed realization, respectively. However, operating margins declined due to a 14 per cent year-on-year increase in operating expenses per tonne, while EBITDA remained flat. The story was no different for the others. Dalmia Bharat saw a 20% increase in expenses, while prices increased by just 3%.
“Cement coverage reported an inline YoY EBITDA decline (20%) for QFY22 on cost pressures,” the Jefferies report said. Volumes remained flat year-over-year, while operating quarter-on-quarter, up 17-18%. Unit Ebitda QoQ rose on the back of leverage driven. Over Cost In the near term, as the monsoon season begins a weak period, stock prices may see consolidation.
Not surprisingly, experts take a cautious approach. In cement, cost pressures will continue to be a headwind for manufacturers, said Deepak Jasani, head of retail research at HDFC Securities Ltd. Cement manufacturers have raised prices several times in the last few months due to increased demand. However, prices continue to improve with rising costs. Apart from this, further increase in prices will affect the demand. The coming monsoon may further reduce demand and keep profitability and earnings under check,” Jasani said.
The approaching monsoon means that the expected recovery in earnings will happen only in the second half of the financial year.
Similar opinions are echoed by other experts as well.