Considering the sluggishness in the economy and subdued cement prices, one shouldn’t expect much from the September quarter earnings of cement companies. As it is, the second quarter is seasonally weak for the sector. That said, firms can see some relief on operating margins due to easing cost pressures. However, the full benefit of that would reflect only partially in the September quarter results.
Analysts say that the impact of softening price of key input materials such as petroleum coke should reflect meaningfully from the third quarter due to higher cost inventory held by these companies.
“Both petroleum coke and international thermal coal prices have corrected by +20% in the past 4-5 months. However, due to weather-related disruptions at Coal India, the supply to non-power (firms) has reduced and e-auction premiums have started increasing. Factoring the lag impact of high cost inventory, we estimate only ₹20-30/tonne quarter-on-quarter fuel cost reduction in 2QFY20 and expect a total reduction of ₹70-80/tonne to reflect from 3QFY20," said a Kotak Institutional Equities Ltd report dated 7 October.
According to analysts at Reliance Securities Ltd, the operating cost/tonne of the industry is likely to remain flat sequentially, as saving on fuel prices would be offset by low utilization and higher maintenance cost. Utilization levels are below 70% due to poor demand growth and excess capacity.
Meanwhile, expectations on volume growth and realizations remain muted. “While government data indicate flat volumes for H1FY20, industry participants estimate a dip of about 3%. Cement prices succumbed to volume pressure and, thus, may have dipped 7-8% QoQ versus a 9-10% surge in Q1FY20," Edelweiss Securities Ltd said in a report on 7 October. South-based producers are likely to witness a relatively sharper decline in sales volume, say analysts.
All told, it is expected to be an uneventful quarter for cement makers. A knee-jerk reaction was witnessed in cement stocks following corporate tax cuts; however, there is no official confirmation from cement firms if they would switch to the new tax regime. In fact, analysts say cement makers are better off sticking to the old format given some of the sops they are claiming. So, for the sector’s valuations to turn attractive, meaningful demand revival and improvement in prices remain the key.