Spurt in volume, price hike to cushion cement firms against rising costs

A rise in volume accompanied by a moderate hike in cement prices is likely to outweigh the impact of rising input costs for most cement firms in the March 2020 quarter, believe analysts, who expect the sector to post decent growth in Q4-FY21 and carry this optimism into fiscal 2021-22 (FY22) as well.

For FY22, Crisil, Ratings estimates volume growth at 13 per cent, aided by an expected revival in demand from infrastructure and urban housing sectors. Operating profits, they believe, could moderate by Rs 200-250 per tonne in FY22 due to higher cost and lower net realisation.

“However, cash accruals won't be affected as higher volumes will offset the impact of lower profit margins. Higher cash accruals will keep the net debt to EBITDA ratio salutary at 1.4-1.5 times next fiscal, despite an increase in capital expenditure,” said Isha Chaudhary, director of research at Crisil.
 

Margins, off late, have been under pressure owing to a rise in input costs. Power and fuel costs, which constitute around 25 per cent of the total cost for a cement company, are likely to remain under pressure due to a sharp increase in pet coke (up 65 per cent from since June to $125/metric tonne in March 2021) and coal prices (up 45 per cent since June). Freight and forwarding costs (30 per cent of total cost) are also likely to be impacted by higher diesel prices. Discretionary spends related to marketing, travel, etc. are likely to return, although some cost savings are likely to continue, analysts say.
 

“While realisations are likely to remain flattish, an increase in input costs could lead to a further sequential moderation of Rs 100-125/metric tonne (mt.), resulting in flattish EBITDA/mt. in Q4-FY21 on a y-o-y basis,” Khushbu Lakhotia, associate director at India Ratings and Research (Ind-Ra) said.

Price hike
 

However, some of this pressure has already been passed on to the consumers with cement firms resorting to price hikes in March ranging between Rs 5-35 per bag. As a result, all-India average retail price has surged by Rs 16 per 50 kg bag month-on-month (MoM ) to Rs 363, the second best in FY21 after April 2020’s increase of Rs 27 per bag, reports say.

All-India average cement price, according to analysts’ estimates, is likely to be up around 1 per cent quarter-on-quarter (QoQ) and nearly 5 per cent YoY in Q4-FY21E. As per Elara's channel checks, South India, Maharashtra, Delhi, Rajasthan, Bihar, Madhya Pradesh, Uttar Pradesh and West Bengal, cement firms may attempt a another round of price hike in the range of Rs 10-30 per bag in April.
 

“For the full year, all-India average price is likely to be up around 4 per cent YoY on the back of a robust jump of nearly 14 per cent YoY in South India, followed by 5 per cent rise in West India, 3 per cent rise in North India and 1 per cent YoY rise in Central India. East India is likely to be down around 1 per cent YoY,” they said.
 

At the bourses, most cement stocks have done well in the last six months. JP Associates, JK Cement, Ultratech Cement, The India Cements have been outperformers, rallying 39 per cent to 135 per cent since then. In comparison, the S&P BSE Sensex has moved up 29 per cent, while the mid-and small-cap indices on the BSE have gained 36 per cent and 37 per cent during this period, data show.

The stocks, according to G Chokkalingam, founder and chief investment officer at Equinomics Research are factoring in most positives. “Price hikes – be it the ones undertaken in March or likely in April – are already penciled in. That apart, companies will continue to face input cost pressures going ahead, which they may not find easy to pass on to consumers. It is advisable to book profit now and buy again on a dip,” he advises.