Margin gains to support cement companies amid slowing demand in Q3

The demand for cement slowed in the third quarter of financial year 2023-24 (Q3FY24) and prices began to moderate in November and continued to ease down in December and January.

However, low fuel and raw material (RM) prices meant that cement manufacturers enjoyed good margins even though prices dipped.

The slowdown was partly attributed to state elections that led to a freeze on construction activity. However, Q4FY24 could see some rebound in construction in pre-election spending, with a moderation again in Q1FY25, given the upcoming general elections in April-May. Assuming RM and fuel prices stay low, Ebitda (earnings before interest, taxation, depreciation, and amortisation)/tonne realisations could remain strong.

Year-on-year (Y-o-Y) volume trends were positive in Q3 with single-digit growth. India’s largest manufacturer, UltraTech Cement has reported 6 per cent Y-o-Y volume growth for Q3. JK Cement may be a volume outperformer with 17 per cent Y-o-Y on the back of new capacity coming online. Profitability growth will depend on price improvements.

The Adani Group’s takeover of Ambuja Cements and ACC may have sparked more activity across the sector with industry taking initiatives to address supply-chain issues. In the long-term, this should result in cost reductions and better operating leverage for most players.

In the short- term, however, utilisation may be range bound at 70-75 per cent of capacities. Most cement majors are pushing capex in anticipation of long-term demand.

Long-term volume growth could be in the range of 7 per cent for the aggregate industry across India. The Q3FY24 Ebitda/tonne should improve by Rs 200/tonne quarter on quarter (Q-o-Q) and Q4 may sustain or even improve by up to Rs 100/ tonne.

Backed by 6-7 per cent volume growth, Ebitda may rise by over 54 per cent Y-o-Y and 26 per cent Q-o-Q and net profit could spike by between 85-103 per cent Y-o-Y and 31 per cent Q-o-Q for the aggregate listed industry.

Among largecaps, Shree Cement should lead in Y-o-Y volume growth, while JK Cement among midcaps will grow much faster than peers. Grasim is expected to show profit decline (viscose margins are also down, affecting its other divisions).

Cement firms with a higher exposure to East and South India should report more improvement.

A steady improvement in demand should also mean prices are sustained. Most firms should gain more on the cost side due to structural improvements in their business models as well as likely gains in terms of lower raw material and fuel costs.

An uptick in demand (after a soft November-December 2023), soft coal/petcoke prices and pricing improvements are key points to watch for in Q4FY24. Price discipline will be crucial as there will be a temptation to compete for market share on price while there are surplus capacities across the industry.

The industry has seen committed investor support for several quarters even though demand has not picked up. However lower costs have helped with realisations and that optimism remains.