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There is no light at the end of the tunnel for investors in cement stocks, at least for now. Shares of key cement manufacturers Ultratech Cement Ltd, ACC Ltd, Ambuja Cements Ltd and Shree Cement Ltd have dropped 12-8% in the last five trading sessions.

This is despite dealers' channel checks indicating that price hikes have been taken in some regions. On a month-on-month basis, cement prices have risen by 4-5% in southern, western and eastern India, according to Jefferies India Pvt Ltd's report dated 3 March. On the other hand, the northern region saw a month-on-month price decline of 2%.

Two crucial factors have not played out as per expectations of the Street. In a double whammy, costs are feared to rise futher and uptick in demand has not been as strong as previously anticipated. It should be noted that cement companies use crude-derived petroleum coke (petcoke) and imported coal as key inputs. Prices of these commodities were already elevated, but the ongoing Russia-Ukraine conflict could add to further upward pressure on supply constraints.

"There has been a substantial increase (up 75%/52%) in South African/Australian coal prices in the last one month (40-50% increase in two weeks)," domestic brokerage house Motilal Oswal Financial Services Ltd said in a report on 2 March.

At present, imported coal prices are significantly higher than their peak in October 2021. For example, the South African coal price stood around $300/tonne versus its peak of $248/tonne. Petcoke prices too have started to rise, added the report.

Analysts caution of peak margin pressures for cement companies in the June quarter of FY23.

As far as demand growth is concerned, there is no cheer on that front as well. It should be noted that March quarter is seasonally strong for the sector and has historically seen meaningful uptick in construction activities. However, this time around demand so far in the quarter, has remained muted.

"Demand was weak in Feb'22 like Jan'22 - while dealers attribute to increasing costs of construction materials like steel/sand, companies attribute it to a high base," said the Jefferies report. Given the unimpresaive demand scenario, analysts at Jefferies see a risk to their estimate of Rs40 per bag increase in cement prices in Q4FY22.

Needless to say, for cement companies the risk of earnings downgrades is getting more pronounced. "Variable costs are expected to remain elevated in H1CY22 and may pose downside risks to our / consensus FY22-24E earnings in the absence of cumulative Rs45-50/bag price increase during H1CY22," analysts at ICICI Securities Ltd said in a report on 2 March.

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