Cement: Demand recovery at the mercy of govt spending
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Most cement makers reported decent volume growth in the September quarter. This was led by factors such as a favourable base, a ramp-up of capacities and market share gains.
Among pan-India cement makers, ACC Ltd and Ambuja Cements Ltd saw 18% and 12% growth in sales volumes, respectively. UltraTech Cement Ltd’s volume growth of 18% was on the back of a merger of Jaiprakash Associates Ltd’s cement capacities. Similarly, among regional firms, south-based India Cements Ltd’s double-digit volume growth, too, was driven by the merger of Trinetra Cement Ltd and Trishul Concrete Products Ltd.
On the other hand, volume growth in some markets like Tamil Nadu and Gujarat were impacted by lower sand availability and floods, respectively.
Realizations were much better than anticipated despite September being a seasonally weak quarter. However, an increase in realizations was not adequate to offset the spike in fuel and power costs due to elevated petroleum coke (petcoke) prices.
Petcoke is a key input material for cement producers. Petcoke prices began to harden after August when Hurricane Harvey hit the US. Operations of oil and gas refineries were disrupted by the hurricane that led to production shutdowns, causing a shortage of the fuel. Many Indian firms rely on imported petcoke. Price of imported petroleum coke is currently hovering at $105.
Apart from that, some firms saw higher raw material cost since slag prices jumped. According to analysts, prices of slag have risen 65% year-on-year (y-o-y). Freight costs, too, rose for most firms due to increased diesel prices. As a result, profitability of cement makers declined from the peak of June 2018 quarter.
The second half of the fiscal is comparatively better for the sector in terms of demand. However, the urban housing segment has slowed after the Implementation of the Real Estate (Regulation and Development) Act. So, the sector is reliant on government spending on schemes such as Housing for All, Clean India Mission and other infrastructure projects.
The sand mining issue that affected demand in certain pockets may get sorted soon. Better demand is likely to translate into further improvement in realizations.
While volumes and realizations may head northwards, cement makers are unlikely to see much relief on the cost front, especially of power and fuel. The fear is that if the ongoing rally in global crude oil prices continues, it would lead to a further hardening of petcoke prices, impacting margins.
Meanwhile, many large and midcap cement stocks continue to trade at expensive valuations. Given the aforementioned concerns, valuations need to correct.