Outlook black for cement companies

What is the decline in Ebitda/tonne on an overall basis? 200-400 sequentially and year-on-year in the December quarter,” said Mangesh Badhang, research analyst at Nirmal Bang Institutional Equities. Ebitda is earnings before interest, tax, depreciation and amortization.

Cement companies raised prices in the first half of Q3 but were eventually pulled back due to poor demand. Unseasonal rains kept cement demand low for a quarter in many parts of the country where construction-related activities generally pick up.

Away from these factors, the EBITDA estimates for FY22 and FY23 have been revised lower for the sector. However, there is concern that if demand does not improve enough to support the rise in prices, earnings estimates could go down further.

“Earnings of cement companies have already shown a decline after the third quarter, which is reflected in the recent correction of cement stocks. If prices fail to sustain higher levels, the downgrade may further intensify.” Shares of Shree Cement Ltd., Ambuja Cements Ltd. and ACC Ltd. have fallen 7-17% in the past six months.

Petroleum coke and coal are the major fuels used by cement manufacturers. The cost of electricity and fuel is generally estimated to be 25-30% of the total operating cost of the sector. Analysts said cement makers have got some respite from cost inflation so far in the March quarter. He also cautioned about the upside risks from rising crude oil prices, which could lead to higher transportation costs for the sector.

Given the inflationary environment in the industry, Naveen Sahdev, Director, Institutional Equities, Edelweiss Securities Ltd, cautioned that the operating performance picture of the cement sector appears bleak in the near term. “We have reduced our Ebitda estimates by 7-12% for major companies like UltraTech, Shree, ACC for FY13. If cement prices do not improve substantially, this fall could be severe.”

Against this backdrop, sustaining price growth is critical for improving realizations of cement companies. Unfortunately, there is little good news on that front.

The latest dealers channel check by Kotak Institutional Equities showed that cement prices in India are up 5% month-on-month. 376/bag in February. The domestic brokerage house is of the view that margins may not recover meaningfully in Q4 FY22 and there is a risk of fall in consensus earnings estimates given higher costs.

The steep fall in earnings does not bode well for investor sentiment towards these stocks and their valuations.

Bloomberg data shows that on an EV/Ebitda basis, major cement makers Shree Cement, UltraTech Cement Ltd, ACC and Ambuja Cements are trading in the range of 9-18 times FY13 earnings estimates. Shree Cement is trading at the highest valuation multiple of 18.33x, followed by UltraTech at 14.21x. EV is enterprise value. “Obviously, the risk to earnings will be assessed on valuation. Stocks like UltraTech have seen their EV/Ebitda manifold moderate from 18x earlier. We think the earnings risk could become an overhang for cement stocks, which would eventually reflect in their valuations,” cautioned Sahdev.