Price hikes won't lead to gains for cement firms

The increase after six months of decline should only help neutralise cost pressures

The recent increase in cement prices, at best, provides some relief and is unlikely to drive profitability of cement companies, given muted demand and cost pressures.

Domestic cement demand has remained absent for the most part of FY18 so far. While the first half of FY18 bore the impact of goods and services tax (GST)-related adjustments, sand mining issues, labour shortages in some states and implementation of the Real Estate Regulatory Authority (RERA) Bill slowing down construction activities, led to lower-than-expected demand. With all this, ICRA now expects a rebound in cement demand only from the March 2018 quarter, against the earlier expectation of the December quarter. Consequently, it pegs cement demand to register one per cent growth for FY18.

Although all-India cement prices increased in December after declining for six straight months, according to analysts’ data, it was led by price hikes in the north to counter rising costs due to the ban on petcoke usage. All-India average prices are up 0.4 per cent (or by Rs 1-2/bag) month-on-month in November, mainly owing to price recovery in the northern and southern markets, to the extent of two per cent (month-on-month), suggests data from Reliance Securities. Prices in the west, however, are down by 1.7 per cent month-on-month, while those in the eastern and central regions remain flat. Binod Modi at Reliance Securities said though demand witnessed a rebound in November after festivities, the momentum is yet to pick up convincingly, as persistent sand crisis and slowdown in real estate activities after RERA remain major headwinds.

Overall, cement prices are down by Rs 16 per bag sequentially in the December quarter till date (according to Kotak Institutional Equities), especially due to weak trends in the southern region. FY18 started on a good note with sharp price increases seen across regions, but thereafter, subdued demand and one-off disruptions (such as the GST) have led to a sharp price correction since May, Kotak Institutional Equities said.

The subdued realisations aren’t good news, given the rising fuel and logistic costs for cement manufacturers. Not surprising that the share prices of all cement majors, including UltraTech, ACC, Ambuja Cements and Shree Cement, are down 6-11 per cent since October-end.

Moving forward, though hopes remain alive on demand push coming from infrastructure and housing segments, analysts are sceptical on the near-term outlook. Modi at Reliance Securities said while he expects cement prices to be hiked meaningfully from next month onwards, the companies’ endeavour to push more volumes may restrict price recovery. He added that all-India average cement price was still flat year-to-date (YTD) in FY18, which was mainly supported by the western (up 5.6 per cent YTD) and eastern (up 1.8 per cent YTD) regions. He believed (further) price increases were crucial for cement companies in the wake of spiralling cost pressures. Kotak Institutional Equities also expects FY18 to be another year of pressure on earnings as rising costs present another headwind in a weak environment.