Cement Sector On Track For Demand Pick-Up, Say Analysts
Analysts at Emkay and IDBI Capital expect cement companies to hike prices in the range of Rs 10–15 at the pan-India level.
After a subdued second quarter, the Indian cement sector is likely to see a pickup in demand driven by pre-election construction, according to analysts.
Cement stocks such as Dalmia Bharat Ltd., India Cements Ltd., JK Cements Ltd., Ambuja Cements Ltd., and JK Lakshmi Cement Ltd. have surged 40–95%, whereas Birla Corporation Ltd., Ramco Cements Ltd., and ACC Ltd. rose 9–30% in the last six months.
Cement Price Hike On The Cards
Cement companies raised prices in October and November, which were sustained by the markets. Channel checks suggest that cement companies are planning another hike in December.
Analysts at Emkay and IDBI Capital expect the quantum to be Rs 10–15 per bag at the pan-India level.
“The macros of the cement industry remain stable in the long term, driven by demand from the urban housing sectors, upcoming infrastructure projects, as well as generous rural demand, though presently the sector is riddled with cost-side issues," Ravleen Sethi, associate director at CareEdge, said.
As the sector grapples with the higher fuel cost, a sustained increase in prices without impacting the demand momentum stands critical for the operational performance in the near term, according to Sethi.
Although the credit metrics of the industry largely remain stable due to the net cash-positive positions of the large players, medium-sized players are likely to witness more moderation in the credit metrics due to subdued profitability and capex-related debt, which is expected on their balance sheets.
The players need to take price hikes in a gradual manner so that it does not weigh down on demand revival. An increase of approximately Rs 25–30 per bag would be required to offset cost inflation on a year-to-year basis, and a hike of Rs 45–50 per bag is required to restore profitability back to FY21 levels.
Price Hikes, Lower Costs To Aid Margins
Cement companies have taken three consecutive price hikes, with the November increase of 2% or Rs 6–7 per bag on average. The key is margin improvement on the back of lower input costs. The industry was facing severe margin pressures as energy prices rose.
Operating costs of cement companies are expected to moderate in the second half of the current fiscal. Average imported coal prices for November stood at $214 a tonne, declining 21%. Power, fuel, and freight expenses together constitute about 55–60% of the total costs for cement makers. An increase in costs in the second quarter saw cement companies report multi-year low margins.
Demand Outlook
Spending ahead of the 2024 general election will help spur up demand. The combined government capex has risen to an all-time high of Rs 12.3 lakh crore—with Rs 7 lakh crore from the centre and Rs 5.3 lakh crore from the states—and is likely to exceed Rs 14 lakh crore in FY23 going by budget estimates and current trends. Real estate revival, especially in urban centres, as evidenced by the rising sales of commercial and residential properties by key listed developers, will also help.
IDBI Capital expects cement utilisation to be at an eight-year high in FY23 and FY24 at around 69%. CareEdge sees FY23 cement demand growing 8–9%.