The cement sector is in the news for many reasons. Adani Group has completed the acquisition of Ambuja Cements Limited and ACC Limited by buying Holcim’s stake in both the companies. There was a gradual improvement in cement prices in September. The fight against high input cost is also on. Still, the outlook for investors in the cement sector is not very beautiful.
In early September, cement prices have increased in all regions except the West, according to a recent channel check of cement dealers by Anand Rathi Shares and Stock Brokers Ltd. South India sees fastest month-on-month (Mother) growth 25 per bag, the data showed, followed by north and central India.
see full image
Cement prices are important to gauge the recovery trend of the sector, but the second quarter is a weak quarter for the sector due to the monsoon. Naveen Sahdev, Director (Institutional Equities), Edelweiss Securities, said, “After sharp fall in July and August, the rally in cement prices in September has provided some respite.”
However, given the ongoing heavy monsoon over many parts of the country, price stability could be a challenge. Thus, cement companies are unlikely to see an increase in physical earnings due to the recent price hike, Sahdev said.
Of course, the big event has been the completion of the deal by the Adani Group. it announced a fundraising 20,000 crore through preferential allotment of warrants in Ambuja, whose shares have been on an upward trend, reached a 52-week high. 585.70 on Tuesday.
The Street widely expects the Adani Group to add more capacity. Ultimately, it aims to double its cement manufacturing capacity in the next five years. However, clarity is awaited on whether the company will choose the organic or inorganic route to achieve this. Meanwhile, shares of many midcap and smallcap cement companies have risen.
“There is renewed optimism for consolidation in the sector, which has led to a rise in stocks of companies trading below their replacement cost in hopes of an acquisition or merger,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. An organic approach, the industry may have a hard time absorbing the incremental supply without affecting prices, he said.
The practice of capacity addition by large cement manufacturers to beat competition has meant a flood of supplies. Rajesh Ravi, institutional analyst for cement at HDFC Securities, said in the last five years till FY2011, the industry was adding an average capacity of 15-20 million tonnes per annum (MTPA) every year. This number is now expected to rise to 30mtpa.
If cement demand does not improve sufficiently to absorb the incremental supply, the sector’s capacity utilization level will come under pressure.
Meanwhile, prices of key inputs such as petroleum coke and coal have eased from recent highs in global markets. Further moderation in prices is expected, but whether they calm down by 2021 levels remains to be seen.
Reducing power and fuel costs will translate into savings for the cement makers, thereby improving operating margins. However, profit will reflect the higher cost inventory for each company after Q3FY23 and as and when it is depleted. Hence, there is hardly any enthusiasm for the cement sector’s Q2 23 earnings. “Cost pressure is easing, but it is largely determined by the market. Cement prices rose in September, but this is not enough to make up for the fall in the previous months. In short, fundamentally, not much has changed to drive significant earnings upgrades for the sector in the near term,” Bhadang said.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.