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Home / Markets / Mark To Market /  Investors in cement stocks can heave a sigh of relief

Cement stocks attracted the wrath of the stock market investors because of their inability to pass on the burden of elevated input costs adequately. The result was earnings downgrades and steep corrections in their stock prices.

However, the tide is now slowly turning in favour of cement manufacturers, at least as far as input costs are concerned. Prices of key inputs petroleum coke (petcoke) in domestic and international markets have declined from their recent peaks. Coal prices in key exporting nations are also on a downtrend. Power and fuel costs are estimated to account for 25-30% of the sector’s total operating costs. Also, lower diesel prices would help cement companies contain their freight costs. As such, investors in cement stocks can heave a sigh of relief.

A breather
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A breather

That said, earnings upgrades for the industry may still be a few quarters away as inventory bought at a high price would take a quarter or two to be used up, explained analysts. Easing input costs could help cement companies see cost savings of 200-250 per tonne, but it will take a few more quarters for this to be reflected in operating margins and eventually earnings.

“The cost of petcoke and coal have stabilized, but they are yet to see a meaningful and sustained moderation. To curb operating costs, a large part of the industry has moved towards domestic petcoke and cheaper sources of coal," said Mangesh Bhadang, an analyst at Nirmal Bang Institutional Equities. These efforts are likely to start yielding results towards the end of Q3FY23, which could then lead to earnings upgrades for the sector, he said. However, falling input costs are not enough for cement stocks to recover and their earnings to improve markedly. That has to be coupled with better cement prices and robust demand growth.

“Cement prices in July corrected by 1% further on a month-on-month basis mainly led by the onset of the monsoon and Q1FY23 exit prices were 3-5% below average prices during the quarter," said Kunal Motishaw, an analyst at Reliance Securities.

Further, dealer channel checks by some brokerages indicate that prices in the early days of August also remained subdued. Since the September quarter is seasonally weak for the cement sector, dealers expect cement prices to see a substantial improvement during Diwali, when the individual home building segment, a key demand driver for the sector, tends to do well.

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Strong demand growth is crucial for cement prices to remain at high levels. “Volume growth in Q1FY23 has been better than anticipated, aided by a favourable base. However, for FY23, the sector may see modest volume growth of 8-9%," Bhadang added.

Also, cement companies are on an expansion spree to protect their market share amid rising competition. Dalmia Bharat Ltd aims to boost its capacity from 37 million tonnes per annum (mtpa) in Q1FY23 to 49 mtpa by FY24. Competitor Shree Cement Ltd is expected to increase its capacity from 46.4 mtpa at present to 56 mtpa by December 2024.

The fear is that aggressive expansion by larger companies could weigh on the sector’s utilization levels if demand does not pick up adequately.

Meanwhile, so far in this calendar year, shares of cement companies, such as Ultratech Cement Ltd, Shree Cement, and Dalmia Bharat, have declined by 13-22%. They are trading significantly below their recent 52-week highs. Consequently, post this correction, their valuations measured on EV/Ebitda basis have moderated. EV stands for enterprise value. Ebitda is short for earnings before interest, tax, depreciation and amortization.

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