There is respite on the cost front, especially owing to lower petcoke prices. This will support profit margins
Investors will watch the pricing actions in the eastern and southern regions, where cement price increases have been relatively subdued
The New Year began on a happy note for the Indian cement sector. Analysts’ channel checks suggested that cement producers have taken price hikes.
“Prices have increased by about ₹10 per bag (3% up from last month) in most parts of the country (according to our channel checks) after declining by about ₹30 per bag in the last six months," wrote analysts led by Amit Murarka of Motilal Oswal Financial Services Ltd in a report on 9 January. A cement bag weighs 50kg.
From a demand perspective, the first half of the calendar year is seasonally better for cement companies. A Motilal Oswal study of cement price movement over the past 25 years shows strong seasonality, with prices rising by 7% on average in the first half of a calendar year, but declining by 2% in the second half.
According to the brokerage firm, volumes get impacted by the monsoon and festive holidays (Diwali, etc.) in the second half, leading to a slowdown in construction activity.
For now, investors will watch whether the recent price hikes sustain. This will depend on how demand shapes up in the coming days. “Cement volumes in November grew 4% year-on-year, though for financial year 2020 (till 30th Nov ’19) volume growth was flat, hurt by the slowdown in government projects, the prolonged monsoon and the liquidity crunch," pointed out analysts at Anand Rathi Shares and Stock Brokers Ltd.
Overall, the outlook for cement volume growth remains tepid for FY20. Outlook for volume growth in FY21 is better because of a favourable base.
As such, demand recovery remains a crucial trigger for stock prices of cement companies. More so as many expect the government to curtail spending in the current quarter to meet its fiscal targets.
Additionally, investors will watch the pricing actions in the eastern and southern regions, where cement price increases have been relatively subdued.
Having said that, there is respite on the cost front, especially owing to lower petcoke prices. This will support profit margins. In the forthcoming December quarter results season, analysts expect most cement companies to report healthy Ebitda (earnings before interest, tax, depreciation and amortization) growth on a year-on-year basis.