Cement: Lower costs aid margins
While demand may improve, backed by a pick-up in rural housing demand and the government’s infrastructure spending, a short-term correction in cement prices may be around the corner
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The highlight of the first quarter earnings of cement firms was their performance on the operating margin front. Prices of petroleum coke (petcoke)—a key requirement—saw a sharp decline, which led to a softening of raw material and power and fuel costs for cement makers. This translated into better earnings before interest, tax, depreciation and amortization (Ebitda) margins for most companies.
Firms such as ACC Ltd, UltraTech Cement Ltd, Ramco Cements Ltd and Mangalam Cement Ltd saw maximum savings in operating cost/tonne due to increased usage of petcoke and improving operating synergies. In the June quarter, ACC, Ambuja Cements Ltd and UltraTech increased petcoke usage to the tune of 60-75%. According to a Reliance Securities Ltd earnings review, operating cost/tonne dipped by nearly 7% on a year-on-year (y-o-y) basis, mainly aided by a 23% decline in power and fuel costs/tonne.
The savings firms made on input costs also aided them in posting better profits. It should be noted that June quarter earnings are not comparable on a year-on-year basis due to a change in accounting standards for non-financial companies from 1 April 2016.
However, as some cement analysts point out that subdued realizations in regions barring the north arrested margin expansion. “North-based firms like Shree Cement Ltd, Ambuja Cements, JK Lakshmi Cement, J K Cement reported sharp uptick of 8-14% quarter-on-quarter (q-o-q)/4-11% y-o-y in realization; while South-based firms like Dalmia Bharat, Ramco Cements, India Cements, Orient Cement reported 3-5% q-o-q/10-12% y-o-y drop in realizations,” said a report by broker ICICI Securities Ltd.
Meanwhile, volumes of the industry likely grew 5.7% y-o-y in Q1FY17. This was led by higher growth in the east and central regions and improved demand in Andhra Pradesh/Telangana, say some analysts.
On a year-to-date and y-o-y basis, cement firms are trading at expensive valuations. The second quarter is seasonally weak. Volume growth in these three months is likely to remain muted owing to the monsoon, leading to price corrections. Apart from that, hardening fuel costs may pinch and would reflect in their September quarter earnings.
While demand is expected to improve in the second half of FY17, backed by a pick-up in rural housing demand and the government’s infrastructure spending, experts anticipate a short-term correction in cement prices for now. However, going ahead, slower capacity addition and incremental demand from proposed government projects such as “smart cities” and “housing for all” would aid the industry, giving the makers of the building material pricing power and, hence, boost profitability.