When cement prices hit a peak in October, the prospects for the sector’s FY24 realizations seemed bright. But hopes were dashed as prices corrected in the next five months. The fallout of weakness in cement prices would be visible in cement makers’ March quarter (Q4FY24) results.
Average pan-India cement prices fell over 4% sequentially in Q4FY24, with southern and eastern regions being severely impacted. This was contrary to expectations of price hikes usually seen in Q4 which is a seasonally strong quarter for the sector owing to robust construction activities.
Motilal Oswal Financial Services estimates, on an aggregate basis, realization for cement companies under its coverage to drop 3% year-on-year and 4% sequentially in Q4FY24 to multi-quarter low of ₹5,485 per tonne.
Dealers channel checks show that steep price hikes of ₹10- ₹45 per bag have been announced in April across regions. One cement bag weighs 50 kilograms. But Q1FY25 (April-June) will see general elections where construction activities, mainly government spending on infrastructure, tend to cool down.
Even post election, volume off-take remains slow with Q2 typically being a weak quarter for cement companies due to the monsoon season.
Secondly, the elevated competitive intensity – as indicated by massive capacity expansions by large cement makers – could keep the sector’s pricing trends volatile. The ramp-up of newer capacities may further weigh on prices as companies increase focus on market share gains.
“The weak exit for March ’24 and the onset of a new fiscal (year) has set the stage for a cement price recovery in April/May ’24. We view these hikes as much warranted to meet the current earnings expectations – sans which there looms a risk of significant downgrades,” said ICICI Securities.
Meanwhile, investors in cement stocks can draw comfort from easing energy costs aiding operating margins. The costs of international petroleum coke and imported coal have declined by about 20% and over 30% in FY24, said analysts. That said, the uptick in cost of fly ash and slag, could impact the sector’s overall raw material costs and need to be monitored.
Further, cement volume growth is likely to be driven by larger companies such as UltraTech Cement and Ambuja Cements Ltd which are expected to see double-digit volume growth in Q4FY24. Thanks to robust demand trends and capacity expansions the industry is expected to close FY24 with a decent volume growth of 10-12%.
Meanwhile, in the last six months, shares of UltraTech, ACC, Ambuja have rallied by 13-43%. The up-move is mainly fuelled by capacity additions. However, pricing discipline remains a crucial earnings trigger for the sector.