As anticipated, the earnings of cement companies in the September quarter were lacklustre as sales volume growth for most companies, except for those having a significant exposure to South India, was subdued due to heavy monsoon rains. Construction activity during the June-September monsoon period is generally dull.

Volume growth was strong in the south due to higher demand, led by infrastructure spending in Andhra Pradesh and Telangana.

South-based cement firms such as India Cements Ltd, Dalmia Cement (Bharat) Ltd and Ramco Cements Ltd registered volume growth in the range of 10-20% year-on-year (y-o-y).

On the other hand, pan-India companies such as ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd saw a decline of 1-10% y-o-y in volumes in the quarter gone by.

Cement volumes in India increased by a meagre 3.3% in the September quarter, according to the Department of Industrial Policy and Promotion (DIPP).

While south-based cement makers scored on the volumes front, north-based companies saw better operating profits, aided by a higher price realization.

The firming up of cement prices in the north since March this year aided a 40-70% y-o-y increase in earnings before interest, taxes, depreciation and amortization (Ebitda) for north-based cement makers.

The realizations of these companies increased by 2-9% y-o-y, said a Kotak Institutional Equities report.

Petroleum coke (petcoke) prices have been continuously hardening. Though most cement companies didn’t see power and fuel costs rising on a y-o-y basis in the September quarter, benefiting from inventory acquired at lower cost, their input costs rose sequentially. And the full impact of rising petcoke prices will reflect in balance sheets from the December quarter onwards, hurting margins, caution analysts.

It is known that production cost is likely to move northwards from hereon; what still remains to be seen is how severe will be the impact of demonetisation on cement volumes, although the managements of cement companies don’t expect much impact as yet. Most cement stocks have seen sharp corrections after the currency exchange decision was announced on 8 November since it is seen as a near-term negative for the sector.

Demand from the rural areas is likely to take a hit since most transactions happen in cash. Urban demand, which was already sluggish, is likely to remain so for some more time.

The much-awaited demand revival which had earlier (pre-demonetisation) been foreseen in the second half of the year, would now be further delayed.

In this gloom, one bright spot could be the government’s spending on infrastructure activities, which may support cement demand to a certain extent. All told, not much is expected from cement companies in the December quarter since sales volume growth would continue to be weak.