OPEN APP
Home >Markets >Mark To Market >Cost pressure easing for cement companies but realizations remain key
A larger concern is whether the revival in cement prices will persist. (Priyanka Parashar/Mint)
A larger concern is whether the revival in cement prices will persist. (Priyanka Parashar/Mint)

Cost pressure easing for cement companies but realizations remain key

  • The to and fro on cement prices restricts clarity regarding better long-term realizations for cement firms
  • It remains to be seen if govt-led infrastructure demand can compensate for overall housing demand

Mumbai: The good news for cement makers is savings from lower input costs, which would show from the March quarter.

Imported petroleum coke (petcoke) prices declined by around 20% from the recent peak in August 2018. Similarly, domestic petcoke and international coal prices have eased.

As a result, power and fuel cost would soften by 17.10 a tonne sequentially, according to JM Financial Institutional Securities Ltd. Year-on-year, savings for cement companies would be about 54.50 per tonne, it said in a note on 15 April.

But the good news ends there.

A larger concern is whether the revival in cement prices will persist.

Declining petcoke costs bode well for the operating margins of cement firms.
View Full Image
Declining petcoke costs bode well for the operating margins of cement firms. (Sarvesh Kumar Sharma/Mint)

As feared, the steep cement price hikes announced in early March failed to take hold in most parts of the country. Inadequate demand growth was no match for excess capacity and weighed on prices. Dealer channel checks by Kotak Institutional Equities showed cement prices dipped in many regions, barring the south and the east.

In March, all-India cement prices averaged 334/bag. One cement bag weighs 50kg.

Still, cement companies continue to drive price increases in certain pockets. Media reports state that cement prices were hiked in some metros by 25-30/bag in April as rural cement demand picked up. For now, realizations for cement companies may rise by 2-3% quarter-on-quarter, especially for south-exposed companies, said analysts.

But this to and fro on cement prices restricts clarity regarding better long-term realizations. Also, it remains to be seen if this government-led infrastructure demand can compensate for overall housing demand, they added.

Hopes aren’t too high, though. As pointed out recently, the mammoth Housing for All scheme has not been able to significantly absorb the excess capacity. And, unless the sector’s capacity utilization improves, a marked rise in profitability would be capped. In short, investors expecting blockbuster earnings from cement companies would be in for a disappointment.

Despite that, large-cap cement stocks continue to quote at multiples of 14-16 times one-year-forward EV/Ebitda. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization. In the present context, these valuations appear rich and should now soften.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Close
× My Reads Redeem a Gift Card Logout