Elevated raw material costs and increased freight expenses weighed on the industry
Management commentaries of key cement makers hint at a rise in demand from Q3FY22
The first half of fiscal year 2022 was quite challenging for cement manufacturers. However, some bright spots point to an easier second half for the industry.
Cement producers face a hit on demand owing to the second wave of covid-19 pandemic, heavy rainfall in many regions, and local issues such as transporters’ strike. Elevated cost of raw material such as petroleum coke (pet coke) and increased freight expenses also weighed on the performance of the industry.
Prices of domestic pet coke surged by around 90% year-on-year (y-o-y) and by 22% sequentially in Q2FY22, analysts said. Inflation in imported coal prices was steeper with a nearly 150% y-o-y jump and 45% quarter-on-quarter (q-o-q) increase. This hit the many cement companies that import the fuel. Investors would reckon that cement companies have now opted for rationalization in employee and promotional costs to protect margins. With economic activity resuming, the costs are also making a comeback with fixed overheads remaining high.
Cement makers have, however, begun increasing prices recently, following an increase in demand. The latest dealers channel check by IIFL Securities Ltd showed cement prices have increased since early October. “The all-India average cement price in Q3FY22 (till date) increased by 4.6% q-o-q, or ₹15 per bag and by 7.5% compared with the price at the end of September," the domestic brokerage house said in a report last week.
“Within regions, the price increase (from the Q2 average) is the highest in the South (+8.5%), followed by the North (+6%), West (+5%) and the central region (+4%). In the East, the average price is still below the Q2 average by 2.5%. However, it improved from end September by 3% (the lowest increase among regions)," it said. A cement bag weighs 50 kg.
The management commentaries of key cement manufacturers in the September quarter showed a demand pick up from Q3FY22, driven by the revival in housing, infrastructure projects and commercial and industrial construction activities. This has given cement companies the confidence of increasing prices. Housing is the biggest driver of demand contributing to more than half of the overall cement sales.
What’s more is that in recent weeks, there has been some easing in prices of raw materials, which adds to the comfort. Analysts at Nirmal Bang Securities Ltd said the crackdown by the Chinese government on coal speculation has brought down the prices of global coal, which is good for Indian cement firms. “Coal shortages were seen in India with reports of coal stocks hitting new lows at power plants. With domestic coal unavailable, imported coal expensive beyond limits, and pet coke being expensive with limited availability, cement companies were staring at fuel shortages or astronomical increase in costs," it said in a report.
With coal prices receding from the recent highs, a large cost overhang will be removed. While the situation is still fluid, analysts at Nirmal Bang said coal prices may not shoot up again in the near-term.
Meanwhile, an analysis by IIFL showed that volumes for 21 listed cement companies grew by around 6% y-o-y in Q2FY22, while marginally declining sequentially in a seasonally-weak September quarter. “Even on a two-year CAGR basis, volumes grew by 6% per annum in Q2FY22, reflecting normalcy in economic activities post the pandemic," said the IIFL report. CAGR is short for compound annual growth rate.
Furthermore, cement volumes in H1FY22 grew by around 24% y-o-y aided by a low base due to the lockdown impact, and around 3% on a two-year CAGR basis, including the impact of the second covid wave this year, added the IIFL report. Volumes are expected to be robust, aided by a receding monsoon and an improvement in infrastructure- and housing-related activities, showed the dealer checks.
That said, after the recent up move in cement stocks, a meaningful upside would depend on the movement in input prices and the pace at which cement companies are able to raise prices to negate the impact of cost inflation. However, analysts caution that price hikes need to be gradual and should not weigh on demand revival.
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