New Delhi : Cost pressures will continue to be a source of adversity for manufacturers, even as the recent major acquisition of Holcim’s Indian properties by the Adani family confirms the prospects of the cement sector.
Cement manufacturers have raised prices several times in the last few months due to increased demand. However, the correction in prices has been lagging behind the ever-increasing cost. 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.
Manufacturers had a good March quarter, with UltraTech volume up 21% sequentially, and ACC, Ambuja Cements, Dalmia Bharat, JK Lakshmi seeing volume improvement of 4-27%. According to Care Ratings Ltd (CareEdge), demand grew 13% year-on-year in December and 17% sequentially in the March quarter.
Demand is expected to remain strong in FY13, especially in the June quarter, which sees heavy construction activity. Cement companies have taken advantage of this and have increased prices significantly during the quarter to meet the higher cost. Average cement price hiked across India 25-30 per 50 kg bag, or 8.1% month-on-month in April 2022, a lifetime high, according to IIFL Securities. The price hike continues to a large extent. However, more hikes would be needed, he said.
The cost of electricity, fuel and freight is still rising and they account for 50-55% of the total expenditure by cement companies. In FY12, crude oil prices increased by 74% while pet coke prices increased by 71%. Coal prices remain high. Analysts said prices of petcoke and imported coal are up more than 50% since February 2022 and even diesel prices have risen by 10% in the June quarter. Therefore, cement manufacturers may require higher price hikes to maintain operational performance. Dealers are looking to increase by Rs 10-20 per bag, which will ease the pressure on margins. However, the concern will be whether this can impact demand as cement accounts for about 5% of the total manufacturing cost, said analysts at IIFL.
Also, June will mark the start of the monsoon season, which will affect construction and thus may make it difficult to maintain demand and prices. Analysts have been kept cautious on the outlook for the sector during the first half of FY13 due to these reasons.
Adani Group’s strategy for Holcim’s assets will be closely watched by the market, so caution will also be exercised. Adoption of any aggressive strategy to gain market share through pricing disruption is a concern, although many analysts looking at premium valuations being paid for acquisitions believe that pricing discipline will be maintained. . But the longer-term outlook remains intact, analysts said. Rural demand is picking up after a good winter harvest and a good monsoon should propel the rural economy further.