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Photo: AP
Photo: AP

Bid adieu to stellar cement margins as higher input costs begin to pinch

Petcoke prices have reached $100/tonne from the lows of $60-65/tonne seen in the previous quarters

The days of soft input costs are coming to an end for the cement sector. Operating margins of cement firms would come under pressure in the December quarter (Q3) as input cost inflation starts to pinch. Shares of key cement firms have scaled new highs as volumes recover. However, eroding margins could dampen investors’ sentiment towards the sector.

On a sequential basis, prices of imported petroleum coke (petcoke) have risen by around 50%, analysts said. Petcoke prices have reached $100/tonne from the lows of $60-65/tonne seen in previous quarters. Also, the ongoing increase in diesel prices would push freight cost higher. Apart from that, other discretionary expenses along with employee costs is seen making a comeback as volumes recover.

Rising expenses in the backdrop of weak cement prices would weigh on Ebitda/tonne of cement firms. Ebitda is short for earnings before interest, taxes, depreciation and amortization. Investors should note that in Q2, benign input costs coupled with rationalization of variable expenses resulted in stellar operating margin growth.

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Rising cost

“In 1H, the industry registered record profitability clocking Ebitda/tonne of around 1,300. In 3Q, we expect average Ebitda/tonne to contract by 150 q-o-q (higher ~ 240-260/T y-o-y) led by softness in realizations and increase in fuel costs. Impact of rise in commodity prices is expected to be spread over 3Q and 4Q as companies restock fuel inventories," analysts at Antique Stock Broking Ltd said in a 7 January report.

Usually, cement firms hike prices in Q4 since it is a seasonally strong quarter. However, the industry has been under the scanner of a fair-trade regulator for alleged cartelization. So, analysts feel that price hikes, if any, would be moderate.

Dealers channel checks indicate that cement prices across most regions remain on a weak footing.

“As per our dealer checks, cement prices witnessed a 2-3% q-o-q price correction during the (December) quarter. However, prices remained strong in north and central on the back of strong rural and infrastructure demand," analysts at Kotak Institutional Equities said in 5 January report.

At an all-India level, cement prices stood at 352/bag. One cement bag weighs 50kg.

Due to excessive capacity addition, east witnessed a sharp decline in prices in Q3. So, analysts believe that cement makers in the north and central regions are better placed than other regional players.

Meanwhile, volume growth is likely to improve further, aided by gradual resumption of residential construction activities and government spending on infrastructure and related projects. On the flipside, the ongoing investigation by the Competition Commission of India could result in heavy penalties, which is a concern.

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