Margins of Cement Companies To Decline Sequentially In Q3FY22

Kotak Institutional Equities expects margins of cement companies to decline sequentially in Q3FY22 given the rollback on prices, weak demand, and lag in consumption cost. The recent underperformance of the shares of cement companies suggests investors are cognizant of these concerns. Stocks of key cement manufacturers are down around 11-40% from their respective 52-week highs.The second half of the fiscal is typically seasonally strong for the sector as construction activity picks up. However, this time, the rebound in cement demand has not been impressive. “The correction in cement stocks has been mainly driven by there being no revival in post-festive demand. This is led by an extended monsoon in the south/east, the sand mining issue, and labour shortage along with peak cement prices." said Abhishek Lodhiya, analyst, Yes Securities. Muted demand has meant a rollback of price hikes made in October and early November. Kotak’s latest cement dealers’ channel check shows that all-India cement prices declined by 4% month-on-month (m-o-m) in December, reverting to September 2021 levels. Cement prices have declined m-o-m across regions, a factor likely to weigh on Q3 margins. Following that, investors would closely watch whether cement demand revives meaningfully in the March quarter, leading to better prices. “As we enter the peak construction season, the sector should benefit from a combination of strong demand led by seasonality and pent-up demand, price hikes, and deflating costs in 4QFY22E," Kotak’s analysts pointed out. Prices of international petroleum coke and coal have begun to ease from their peaks, though they still remain high year-on-year. That said, as variable cost is around 80% of the sector’s total operating costs, moderation in prices of these fuels bodes well for operating performance. Further, cement makers are trying to raise the share of alternative fuels/green energy to combat this volatility in fuel prices and reduce their carbon emissions. In 2022, pace of capacity additions remains something that should be monitored. Here, much depends on how demand plays out. ICICI Securities Ltd’s analysts wrote in a report on 24 December, “While >80 million tonne capacities are planned to be added over FY22-24E, there are usual execution delays of 6-12 months in commissioning which would also depend on the pace of demand recovery." A glimmer of hope for cement investors going into the next year emerges from the robust sales in the residential real estate sector. Investors will keep a close eye on the extent of demand revival in the coming year.