Cement shares in focus; Sagar Cements zooms 20%, UltraTech, Ambuja up 3%

Despite these ongoing cost related challenges, demand outlook is expected to stay healthy from long-term perspective

Shares of cement companies rallied up to 20 per cent, bouncing back from previous week's lows, amid declining crude oil prices.

Frontline cement stocks like UltraTech Cement, Ambuja Cements, ACC, Dalmia Bharat, India Cements, Ramco Cement and Shree Cement rose in the range of 2 per cent to 3 per cent in intra-day deals today. Sagar Cements, meanwhile, zoomed 20 per cent on the BSE in the intra-day trade while JK Cements, Orient Cement and Sanghi Industries added 4 to 6 per cent. In comparison, the S&P BSE Sensex was up 1.5 per cent at 56,607 points at 12:12 PM.

The price of Brent Crude cooled off to nearly a three-week low of $97.44 per barrel on Tuesday as de-escalation talks between Russia-Ukraine continue. On the other hand, Chinese lockdown in select provinces over outbreak of Covid-19 triggered fuel demand concerns. Many cement stocks had hit 52-week lows last week after Brent touched $139.13 per barrel on March 7, the highest since 2008. 

"Although the steep price rise is unsustainable in the long run, it would weigh heavy on cement companies in terms of operating rates (as power & fuel accounts for 27 per cent of total costs) until situation is back to normal. Since most cement companies have two months of average fuel inventories, we will see full impact of the cost escalations from Q1FY23E onwards," said a report by ICICI Securities.

However, companies with higher domestic coal linkages will be least affected. Apart from higher coal or petcoke prices, the recent increase in crude prices may also lead to a rise in the freight costs.

"Overall, we expect cement sector margins to decline 98 bps in Q4FY22E and further by 498 bps in FY23E. Despite these ongoing cost related challenges, demand outlook is expected to stay healthy from a long-term perspective," the brokerage firm added.