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Cement margins may improve in the long run, but near-term risks aplenty

Strong cement prices that prevailed in the northern region throughout the quarter augured well for Shree Cement. Photo: Hindustan Times (Hindustan Times)Premium
Strong cement prices that prevailed in the northern region throughout the quarter augured well for Shree Cement. Photo: Hindustan Times
(Hindustan Times)

  • Analysts and managements of key cement makers see more upside to petroleum coke prices, which have risen more than 70% on a year-on-year basis. Petroleum coke is a key input required to make cement and is derived from crude oil

MUMBAI: Foreign brokerage house Morgan Stanley expects a broad-based recovery in the Indian cement sector and estimates an above-average demand growth of 9% annually over fiscal years 2021-23. Not just demand, it also sees long-term margins holding up despite a dip in FY22. In-line with its upbeat view on the sector, it has raised FY23 earnings estimates for the sector up to 13%.

For now, there are risks to margin growth and eventually earnings, which investors should not overlook. Hit hard by cost inflation, cement makers took a much-needed hike of around Rs50/bag in March, according to dealer channel checks by various brokerages. One cement bag weighs 50 kilograms. On an average, one cement bag now costs Rs360 at an all-India level.

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Reacting to the brokerage firm's upbeat outlook, shares of top cement makers such as Ultratech Cement Ltd, Shree Cement Ltd and Ambuja Cement Ltd rose around 1.5% each on the National Stock Exchange on Tuesday.

Analysts and managements of key cement makers see more upside to prices of petroleum coke, which have risenmore than 70% on a year-on-year basis. Petroleum coke is a key input required to make cement and is derived from crude oil.

Operating margins may also come under pressure due to rising freight charges as diesel prices have remained northbound. Domestic brokerage house JM Financial Institutional Securities Ltd estimates the sector's power cost to increase by Rs81/tonne and freight cost by Rs36/tonne on a sequential basis.

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