Cement stocks: Street hopeful of a better future driven by pricing gains

Cement stocks have taken a significant beating in a seasonally soft quarter affected by monsoon. Realisations have remained subdued, while cost pressures continue unabated. The start of October, too has not seen significant uptick in prices with Kotak Institutional Equities’ channel checks suggesting that all India cement prices are down in the current month by Rs 2 per 50 kg bag compared to September as pricing weakness continued in FY19. 

The pressure on the cost front, however continues to rise. Analysts say, cost pressures may continue for cement companies with spot rupee to dollar rate down five per cent compared to the average rupee rate of 70.1 in September quarter. Since cost pressures hurt with a lag and given close to 35 per cent of the costs are at parity to dollar, these may weigh on profitability in the near term.

Yet, analysts are optimistic. This optimism stems from expectations that cement realisations will catch up soon. Recently, India Ratings maintained a stable outlook on cement manufacturers for the remainder of FY19, driven by a healthy growth forecast across end-markets such as affordable housing, roads and irrigation sector, which would help in sustaining strong volumes.

East, Central and South regions are leading the growth backed by higher government spending on infrastructure (roads and irrigation) and affordable housing, and rural housing demand. Analysts at ICICI Securities say, “Demand growth could surprise for second year in a row with 13 per cent growth in H1FY19, after posting 9 per cent growth in FY18.” They have factored in a 10 per cent demand growth for FY19 and 6.5 per cent for FY20-FY21.

With strong demand, analysts feel that realisations will also catch up gradually. So far this calendar year, realisations have not picked up as cement makers were looking to expand into newer regions/markets. Also, about 25 million tonnes of acquired capacities were being ramped up, and thus rising supplies kept a tab on prices which remained subdued relative to demand growth. But, all this may change as capacity utilisations and demand improves.

UltraTech, which has continued growing its capacities, is best placed to take benefits of the cement upcycle and is amongst top picks of most brokerages. It already commands a 23 per cent market share, say analysts at Motilal Oswal Securities who also like Shree Cement given superior execution.

Meanwhile, ACC and Ambuja Cements, which have shown improvement in their per tonne profitability in past few quarters, can see strong upgrades if the trend continues. Dalmia Bharat’s earnings growth is also expected to be superior compared to industry, led by acquisitions and operating leverage.

Overall, analysts at ICICI Securities say the recent underperformance of stocks adequately factors in a pessimistic scenario of flat operating profit per tonne over next few years. They add, the earnings downgrade cycle is expected to bottom-out with Q2FY19 results.

• The September quarter is usually soft as monsoon impacts construction activities

• Cement realisations tend to remain flat in Q2. For September quarter, the all-India per 50 kg bag average prices stood at Rs 291, lower than previous quarter’s Rs 293 a bag

• Energy costs continue to rise. Pet-coke is up 35 per cent year-on-year and 4 per cent sequentially, while coal imports are costlier by nine per cent sequentially due to currency depreciation

• Diesel prices are up 24 per cent year-on-year and 5 per cent sequentially impacting logistics costs. All this creates margin headwinds for cement makers

• Analysts, however remain optimistic on the future on expectations of improvement in realisations as they believe demand will remain firm