Cement: Price hike insufficient to drive profitability

The price increase, which comes after six months of decline, should only help pass on cost pressures

Domestic cement demand has remained absent for the most part of FY18 so far. As the first half of FY18 bore the impact of goods and services tax (GST) related adjustments, the sand mining issues, labour shortages in some states and implementation of the Real Estate Regulatory Authority (RERA) Bill slowing down construction activities, all led to lower-than-expected cement demand. With all this, ICRA now expects a rebound in cement demand from the March 2018 quarter as against earlier expectations of December quarter, and consequently pegs cement demand to register a one per cent growth for the entire fiscal.

Although the all-India cement prices increased in December, after six straight months of decline since May 2017 as per analysts’ data, it is on the back of price hikes in North region to counter rising costs due to the ban of pet coke usage. All India average prices are up marginally by 0.4 per cent (or by Rs 1-2/bag) month-on-month in November mainly owing to price recovery in Northern and Southern markets to the extent of 2 per cent (month-on-month), suggests data from Reliance Securities. Prices in the west, however, are down by 1.7 per cent month-on-month, while those in Eastern and Central regions remain flat. Binod Modi at Reliance Securities says that though demand witnessed a rebound in November after festivities, momentum is yet to pick up convincingly as persistent sand crisis and slowdown in real estate activities post RERA remain major headwinds.

Overall, cement prices are down by Rs 16 per bag sequentially in the December quarter-till date (as per Kotak Institutional Equities), especially due to weak prices in southern region. FY 2018 started on a good note with sharp price increase seen across regions, but thereafter, subdued demand and one-off disruptions (such as GST) have led to a sharp price correction since May 2017, say analysts at Kotak Institutional Equities.

The lower realisation is not good news, especially looking at the rising fuel and logistic costs for cement manufacturers. Not surprising that all cement majors including UltraTech, ACC, Ambuja Cements and Shree Cement have seen their share price correct 6-11 per cent since the last week of October.

Moving forward, though hopes remain alive on demand push coming from infrastructure and housing segments, analysts are sceptical on the near term outlook. Modi at Reliance Securities says that while he expects cement prices to be hiked meaningfully from next month onwards, companies endeavour to push more volume may restrict price recovery. He adds that all India average cement price is still flat year-to-date (YTD) in current fiscal, which was mainly supported by Western (up 5.6 per cent YTD) and Eastern (up 1.8 per cent YTD) regions. He believes price increase is crucial for cement companies in the wake of spiralling cost pressures.

Kotak Institutional Equities also expects FY18 to be another year of pressure on earnings as rising costs presents another headwind in a weak environment.