Cement investors see Q3 with mixed feelings

Cement demand in October was impacted by extended monsoon; there were also labour shortages on the back of the festive season and holidays. In November, the uptick in demand was marginal compared to October.

In the last few weeks, cement demand has been largely driven by government infrastructure projects, while the individual home building segment is yet to recover, said Motilal Oswal Financial Services Ltd in a report on 20 December.

Housing is the largest contributor to the sector’s overall demand. The domestic brokerage house expects cement demand to see 7% year-on-year growth in Q3FY23, albeit aided by last year’s low base.

It is hardly surprising then that lower-than-anticipated rise in cement demand translated into an unimpressive movement in cement prices.

According to an Ambit Capital Pvt. Ltd report on 21 December, trade prices remained flattish (month-on-month) in December as most price hikes taken in November were rolled back in December. In the trade segment, cement is sold by the manufacturer to dealers, who in turn sell to consumers. On an average, pan-India cement price rose by nearly 3% sequentially in Q3FY23 quarter-to-date, said the Motilal Oswal report. The highest increase in prices of around 9% was seen in the eastern region, followed by the south and west, where prices increased approximately 4% each, it added.

What’s more, cement dealers don’t expect more improvement in prices and demand in December. Further increase is expected only post the festival of Makar Sankranti which is on 14 January, said the Ambit report.

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For most of 2022, cement stocks were in focus due to severe cost inflation pressures. The good news is that costs of key inputs such as imported petroleum coke (petcoke) and coal, have softened from their recent peaks. However, they remain volatile. In December, while petcoke prices declined month-on-month, the price of coal has risen. This volatility means that the sector’s variable cost, which spiked in recent quarters, would see a gradual decline.

“Input costs have not corrected as drastically as we were anticipating at the start of the December quarter. That said, the sector is poised to see some moderation in variable costs,” said Mangesh Bhadang, senior vice president, Centrum Broking Ltd. Remember, in Q2FY23, the sector’s Ebitda margin slipped to a multi-quarter low, hurt by severe cost inflation.

On average, the sector’s Ebitda per tonne may rise by ₹250-300 sequentially in Q3FY23, said Bhadang.

Going by the price trends seen so far in the quarter, on an average, cement realization will see a marginal uptick of 2-3% sequentially in Q3FY23, he added.

With the beginning of the peak construction period, coupled with pre-election government spending on infrastructure, the sector’s near-term outlook is robust. In FY23, analysts expect 10-11% demand growth. But for sustained improvement in cement demand and prices, the individual housing segment has to make a significant comeback.

During the course of the year, cement companies have suffered steep earnings downgrades, mainly on worries of elevated costs denting margins. Cost pressures have likely peaked out, but significant earnings upgrades would depend on the pace of revival in cement prices and margins, said analysts.