Cement stocks underperform, realisation improvement remains elusive

The rising pet coke and transportation costs remain a cause for concern and limit profitability improvement

Cement majors like UltraTech, ACC, Ambuja and Shree cements have seen their stock prices correct 13-18 per cent since their January highs. While broader indices, too, are down 5-6 per cent from their peaks in end-January, the underperformance by cement stocks has surprised. 

The January-March quarter is seasonally strong quarter. The construction activities start picking up post end of winter season and momentum continues to catch pace till monsoon strikes in June and July.

The underperformance however can be attributed to cement realisations not catching up though volumes have continued to grow. Recent Analysts channel checks suggest that per 50 kg bag average all India cement prices during the March quarter have declined 0.3 per cent sequentially and by a per cent year-on-year during the March quarter.

This remains a cause of concern as impetus to profitability is to be provided by improvement in realisations only. Fuel and transportation costs have continued to rise regularly and with persisting cost pressures cement companies may not also see profitability improvement during the March quarter.

The cost pressures on cement companies are being led by rising fuel costs as logistics costs too have been on a rise.

Spot pet coke prices are 20 per cent higher than December quarter average and Truck rentals are also 8-9 per cent up sequentially say analysts. Credit Suisse says that total impact of pet coke and freight is Rs 125 a tonne sequentially.

However they expect full quarter volume growth to be in the range of 6-7 per cent. Thus profitability per tonne is expected to remain largely flattish despite higher costs due to better volumes generating operating leverage benefit.

On the positive side the sand availability issues that had been impacting demand particularly in states of Uttar Pradesh have improved substantially and Bihar  is witnessing gradual improvement  too say analysts as Binod Modi at Reliance Securities.

This is likely to be supporting some realisation improvement in Central region of the country, as East continues to see strong momentum too. Nevertheless other parts of the country still continue to disappoint on realisations.  

South India has seen the steepest decline in realisations though hopes on gradual improvement remain led by expectations that Tamil Nadu is to see better sand availability. Analysts post the courts clearances for sand mining in Tamil Nadu say that the state government is likely to operate sand quarries.

The West India and North India too are being watched with optimism for realisation recovery. Analysts feel that as demand improves cement companies try and gain market share and push up volumes first whereas prices hikes are taken later.

The other reason for price hikes not being taken could be that government has been vigilant on cement prices say analysts though Modi says he expect prices to witness an up move in coming months due to rising cost pressures and sustained demand growth leading to higher utilisation.