Declining prices of imported coal a respite for cement makers

In the December quarter (Q3FY23), the operating performance of cement manufacturers was not very exciting. According to analysts at JM Financial Institutional Securities Ltd, while there was a sequential Ebita/tonne improvement in Q3FY23, this metric has not yet recovered completely to previous highs. Ebitda is short for earnings before interest, tax, depreciation and amortization.

While it is true that cement prices have not seen the anticipated recovery yet, the easing of cost inflation pressures offers respite and bodes well for the sector’s operating performance. Note that disparity in hike in cement prices and cost pressures culled operating margin to nearly 13.6% over 9MFY23, down 800 basis points year-on-year and lower than the decadal average of 17-18%, ratings agency Crisil Ratings Ltd said in a note on 22 February. Analysts at Crisil Market Intelligence and Analytics point out international petcoke prices have begun easing since the second quarter of FY23 and dipped further in the third quarter, in tandem with crude oil prices.

While it remains to be seen how cement prices move from here on, softening fuel costs would aid the sector’s earnings outlook, to some extent. In Q4FY23, IDBI Capital expects recovery in Ebita/tonne for cement companies and industry Ebitda/tonne to improve by Rs200/tonne sequentially. This is likely to be aided by 10% year-on-year volume growth, 10% sequential decline in fuel cost and assuming 1% sequential price hike.