Cement demand is likely to be on a solid footing in FY24. In the run up to the general elections in 2024, increased government spending on infrastructure and related projects is seen as a key near-term demand driver for the cement industry. The sector has already started benefiting from that.
“The year has started on a strong note with recent channel-checks suggesting 14-15% volume growth in Q1FY24,” analysts at ICICI Securities Ltd said in a report. They expect cement companies to clock 11-12% volume growth in FY24.
But this is not fully surprising. Past trends show that cement volumes tend to get a boost from election-led demand. In the pre-election year of FY19, volumes rose by 13%, according to ICICI. But election-led volumes push usually comes at the cost of prices, which remain muted. This time, too, it is unlikely to be any different. In effect, this would keep the sector’s realization growth outlooksubdued.
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In recent months, cement prices have not seen the expected uptick, despite seasonality benefits. According to some analysts, channel checks indicate that so far in June, cement prices have largely remained flattish compared to May.
“Plus, this is a pre-election year, so we don’t expect any material improvement in FY24. On the contrary, prices are set to decline ~2% year-on-year to ₹382-385 per bag, pulled lower by relatively moderate growth in the trade segment,” said Hetal Gandhi, director – research, CRISIL Market Intelligence and Analytics. This also overlaps with easing petroleum coke (petcoke) and imported coal prices.
Yes, there are other reasons as well, that point to cement prices being range bound, at least for now. For instance, with the entry of Adani Group in the sector, competition is expected to rise, so the chase for market share gains could intensify. In effect, companies are feared to be forced to sacrifice on prices.
Also, many companies have been adding capacities across regions. “Cement companies will continue to add capacities in FY24. That may weigh on cement prices. With the arrival of monsoon, the lean period for the sector will start, so any improvement in prices will happen only in H2FY24,” Uttam Kumar Srimal, senior research analyst at Axis Securities Ltd, said. Further, consolidation is still playing out in select regions with smaller companies losing market share to larger ones, he added.
Moreover, when demand trends are robust, and input costs cool off simultaneously, taking price hikes could derail the demand momentum. Prices of key inputs, like petcoke and imported coal, have softened from recent highs. With easing crude oil prices, its derivative petcoke is also expected to see a further moderation in prices. The decline in diesel prices also bodes well for the sector’s logistics cost. The developments should support profit margins of cement companies.
“International petcoke and coal prices are down ~50%-60% from their respective highs and our recent interactions with a few coal traders/ experts suggest the possibility of a further downside,” analysts at Antique Stock Broking Ltd said in a report on 20 June. This could translate into cost savings of ₹250-300/tonne in FY24, it added. But given the lag in consumption of existing inventory, meaningful margin expansion could come gradually.
The sector had witnessed steep earnings downgrades in FY23 when input costs surged to a peak and companies could not pass them on. Now, while input cost pressures have largely receded, earnings growth momentum in FY24 is more likely to be driven by volumes rather than realisations. In this backdrop, investors will keep a close eye on the extent of margin improvement.
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Updated: 22 Jun 2023, 12:47 AM IST