Cement cos Q3 earnings may dip on dismal pricing environment: Report

Average volume growth is expected to the tune of 6% y-o-y

A delay in capex revival along with dismal pricing environment is likely to affect performance of cement companies in the third-quarter of this fiscal, says a report.

"Cement companies are likely to witness a muted growth in y-o-y earnings. The performance of cement companies is likely to be affected in December 2015 quarter due to delay in capex revival along with dismal pricing environment," a Reliance Securities report said.

Average volume growth is expected to the tune of 6% year-on-year mainly led by volume push, whereas average realisations are down by 1% y-o-y and 2% on q-o-q basis.

Notably, softened fuel and input prices are likely to arrest margin erosion from realisations dip as operating cost/tonne is expected to decline by 3% y-o-y, the report said.

Companies having substantial exposure in eastern, western and central regions are likely to report maximum deterioration in operating margins as realisations in these regions have witnessed an average yearly decline of 4-6% y-o-y.

"We foresee FY17 would be better for cement companies mainly on account of low base of volume growth, realisations recovery, expected pickup in construction activities in the busy season and possible pickup in rural consumption," it said.

The report said that the demand environment remained tepid.

Demand scenario remained abysmal and it could not see a convincing bounce back post the seasonal overhang owing to impediments to private investments and decelerating rural demand.

"Cement companies under our coverage have witnessed an average volume growth of 6% mainly led by new capacity and volume push," it said.

"We observed that barring Southern players, namely Ramco Cements and India Cements, all other cement companies have witnessed a volume growth on y-o-y basis. Shree Cement, JK Lakshmi Cement and JK Cement are likely to report robust volume growth to the tune of 18-23% y-o-y," it said.

All India average cement prices have come down by 2% y-o-y and 3% q-o-q in the backdrop of soft demand and volume push. Western, eastern and central regions have witnessed maximum price correction to the tune of 5-6% y-o-y.

"We believe that the impact of low realizations and demand pressures are likely to be offset by dwindled fuel/input costs. We ascertain industry's operating cost/tonne to witness a decline of 3% y-o-y backed by substantial price reduction in petcoke/coal and diesel prices," it said.

Commenting on the outlook, the report said, "Low realisations and tepid demand are likely to affect Q3 FY16 performance of cement companies.

"We believe performance may improve from Q4 FY16 as current prices appeared to have bottomed out and signs of price recovery in the selected pockets are seen.