Cement stocks ease a bit under pressure due to hike in prices

It is despite channel checks of dealers that prices have been hiked in some areas. Month-on-month, cement prices in southern, western and eastern India have increased by 4-5%, according to a March 3 report by Jefferies India Pvt Ltd. On the other hand, the northern region witnessed a month-on-month decline of 2% in prices.

Two important factors have not played out as the Street expected. In a double whammy, costs are expected to rise further and demand growth is not as strong as was projected earlier. It is to be noted that cement companies use crude-derived petroleum coke (petcoke) and imported coal as major inputs. Prices of these commodities had already risen, but the ongoing Russia-Ukraine conflict could add further pressure to supply constraints.

Domestic brokerage house Motilal Oswal Financial Services Ltd said, “South African/Australian coal prices (up by 40-50% in two weeks) have increased significantly (75%/52%) in the last one month.” report on March 2

Currently, imported coal prices are much higher than their peak in October 2021. For example, South African coal cost around $300/tonne, while its peak was $248/tonne. The report said that petcoke prices have also started rising.

Analysts have cautioned about maximum margin pressure for cement companies in the June quarter of FY23.

As far as demand growth is concerned, there is nothing to cheer on that front either. It should be noted that the March quarter is a seasonally strong one for the region and has historically seen a meaningful increase in construction activity. However, this time the demand so far in the quarter has been sluggish.

“Demand was weak in February ’22 as of January 22 – while dealers attribute the rising cost of construction materials like steel/sand, companies attribute this to a higher base,” the Jefferies report said. Given the unpredictable demand scenario, analysts at Jefferies see a risk to their estimate of cement prices rising by Rs 40 per bag in Q4 of FY22.

Needless to say, the risk of declining earnings for cement companies is becoming more pronounced. “Variable costs are expected to remain elevated in H1CY22 and negative for our/consensus FY22-24E earnings in the absence of cumulative Rs 45-50/bag price increase during H1CY22,” analysts at ICICI Securities Ltd said in a report on 2 could pose a risk.” March.