Limited efforts to protect margins of cement companies worry investors

A recent dealer channel check by Kotak Institutional Equities shows that cement prices at pan-India level on month-on-month basis in September had retraced after the hike in prices at the beginning of the month.

“Most of the regions reported except South India” ₹Prices were increased by 5-10 per bag in early September but most of it was withdrawn. Historically, cement prices have corrected 2-3% quarter-on-quarter during the July-September quarter and the current price trend suggests a similar gradual weakness,” Kotak’s report on September 15 said. The weight of a cement bag is 50 kg. The price of cement at all India level remained constant ₹355 per bag in September.

On the other hand, higher energy costs continued to drive up petroleum coke (petcoke) prices. Analysts said the price of petcoke is currently around $164 a tonne, which is about 4 per cent higher than in August. It has grown by over 30% so far in FY22. Similarly, the prices of imported coal have increased by more than 60% in FY22.

Analysts at JM Financial Institutional Securities Ltd expect power cost to rise ₹187 per ton and freight cost ₹36 per tonne, sequentially, which is a cause for concern considering electricity and fuel expenditure account for 25-30% of the total operating cost of the sector. Also, higher prices of diesel will lead to higher freight charges.

Though cement companies have turned to alternative green fuels to save costs, margins are inevitable in the September quarter earnings. “We are penciling in a gradual increase in the overall energy cost of ₹70-105 on a per tonne basis in the September quarter. We expect operating margins to see some decline as cement prices have failed to sustain higher levels,” said an analyst with a domestic brokerage house, requesting anonymity.

“Despite pick-up in demand, which is expected to support volumes, the recovery is not strong enough in many sectors, hence the hike has been withdrawn. Also, this is a seasonally weak quarter for the sector, so investors should be prepared for weak operating performance in Q2FY22,” he said.

The impact on margins will also impact cement stocks, which have been volatile recently. Shares of pan-India focused cement firms such as UltraTech Cement, ACC Ltd and Ambuja Cements Ltd hit a new 52-week high earlier this month.

“Cost pressures are unlikely to ease in 2HFY22 and we see a downside risk in earnings estimates in the absence of a price hike in 3QFY22E,” Kotak report said. Analysts do not see any reason for further upside in valuations, given the seasonal weakness in cement demand and pressure on margins during the September quarter.