Cement price hikes in April indicative of better volume and profitability
Rising cement prices in April have pointed towards the impending growth in volume and improving profitability for the cement sector
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Mumbai: Cement price hikes in April indicate impending volume growth and possibly better profitability for cement makers in the current quarter, analysts and company executives said.
Average cement prices nationwide picked up strongly in April, a 28 April report by Edelweiss Securities Ltd said. “Average all India prices rose 6.7% month-on-month led by Western and Southern markets where price jumped in double digits, followed by Eastern (up 6% month-on-month) and other regions,” the report said.
An Edelweiss survey showed cement offtake was robust in the East, stable in the North, and marginally weak in Uttar Pradesh due to sand shortage. Cement demand will rise 5-6% as the government awards more road projects, said K.K. Maheshwari, managing director of UltraTech Cement Ltd, India’s largest cement maker.
For the first time since 2001, cement production declined year on year in FY2017, following the government’s demonetisation exercise. Prices fell as well. Prices have now rebounded to pre-demonetization levels in April after being negatively impacted in the West, East and South regions, rating agency ICRA Ratings said.
“With the impact of demonetization gradually subsiding, cement prices have reached the pre-demonetization levels in April 2017 in most markets,” said Sabyasachi Majumdar, senior vice-president and group head at ICRA Ratings. “Going forward, we expect prices to be supported by a marginal improvement in capacity utilisation. The slowdown in new capacity addition and improvement in the supply-demand scenario in FY18 should support capacity utilization levels and thereby cement prices.”
The cement sector is seeing early signs of increase in demand after a short-lived decline and prices of the commodity are likely to rise, Mint had reported on 23 March.
Despite assuming flat volume growth for the sector, first quarter earnings are likely to surprise positively driven by price hikes, PhillipCapital India said in a 27 April report.
“Given a favourable demand scenario, we understand cement prices have been raised across pockets by about 10% and further price hikes of 3-5% cannot be ruled out in May 2017. After the monsoon arrives, cement prices are unlikely to be increased until the end of H1FY18,” the report said. Even if prices were to drop, they would still be 5-6% above March prices, it said.
With the current cement prices, first quarter (April-June) sector Ebitda (earnings before interest, taxes, depreciation and amortization) per tonne is likely to improve by 20-40% quarter-on-quarter and by 15-20% year-on-year, PhillipCapital said.
Most dealers are hopeful that demand will pick up and eventually drive up prices further prior to monsoon, according to the Edelweiss report. “Overall, higher cement prices year-on-year at the outset of FY18 suggest positive price/volume trade-off and better profitability for players in upcoming interims, it said.