Q3FY22 likely to be weak for cement cos, but prospects look good thereafter

Cement demand has not picked up after the festive season, and sales volumes in Nov 2021 are 18-20% lower than Oct 2021 levels, which is far lower than the historical average of 6%

The cement industry always sees seasonal variations in demand due to the weather. The Q3 (Oct-Dec) is normally stronger than Q2 because the South-East monsoon is over, or receding. However this year, there were late rains. This makes it likely that Q3 will be weaker in terms of demand than normal but Q4 is likely to see a recovery. The industry has, however, received a break in terms of input costs, in November, which could help it maintain margins that were being stretched.

Cement demand has not picked up after the festive season, and sales volumes in November 2021 are 18-20 per cent lower than Oct 2021 levels, which is far lower than the historical average of a 6 per cent month-on-month (MoM) decline in November (average of 2005-2020). Industry insiders attribute this to unseasonal rainfall, a sand mining crisis in the East region and in Eastern Uttar Pradesh, an extended marriage season after the Covid-19 outbreak, which led to many marriages being postponed in 2020, and better volumes in October 2021. Cement demand in December is historically around 12 per cent higher than in November and a strong recovery on the lower base of 2021 could mean a MoM rise of more than usual.

Based on current demand trends, industry volumes may decline 4-7 per cent YoY (year-on-year) in Q3FY22, according to industry analysts. The industry was struggling to cope with rising input costs across several variables including higher diesel prices (affecting transport logistics), higher coke prices, higher power costs and higher raw material costs. However, the diesel and coke costs have moderated in November and early December, which eases the margin pressures somewhat, although these costs are still high in historical terms. In YoY terms, coke and petcoke prices are close to double that of a year ago, while diesel is also 25 per cent higher YoY.

Due to weak demand, cement prices have seen partial rollbacks in November 2021 after price hikes in October. Even so, cement prices are up an average 5-6 per cent across India compared to Q2FY22 levels and on YoY basis, average prices are 7-8 per cent higher.

The average spread of cement price over variable costs in Q3FY22 seems to be lower so far (October-November 2021) than in Q3FY21 (YoY) though the spread is slightly better than Q2FY22 when the industry suffered from seasonal weakness in demand and higher input costs. The average operating profit per tonne was higher in Q1FY22 than in the four quarters prior to that, and the following two quarters. Scale seems to count since bigger players have better margins.

According to one estimate, capacity utilisation may have dropped below 60 per cent in Q3FY22. However, the combination of moderating costs (albeit these are still high) and somewhat higher prices (despite partial rollbacks) could enable companies to absorb the costs and maintain margins.

The trigger for industry revival would be a rebound in demand in December 2021, continuing through January-June 2022. Strong government support for infrastructure building could be a pillar of this demand. Increasing industry consolidation with the larger, listed players holding well over 50 per cent market share in every region gives the industry some pricing power. If the listed majors post disappointing Q3 results and share prices drop consequently, this could present an investment opportunity.