Record margins for cement firms a history that’s unlikely to repeat

  • Higher cement prices and easing costs aided margins of producers in the June quarter
  • With cement prices now correcting across the country, margins are unlikely to sustain

Cement producers reported impressive growth in profit margins in the June quarter. Better realizations and easing input costs were key contributors to this. At 1,326, Ebitda per tonne was at a record high in the June quarter (see chart). Ebitda stands for earnings before interest, tax, depreciation and amortization.

Region-wise, cement companies focused on south India did better than others, thanks to the steep price hikes in that market.

But such a performance is unlikely to repeat. This is because demand off-take remains subdued. Election-related uncertainty, and labour and water shortages kept a lid on cement demand in the June quarter. Hence, volume growth was poor for most cement producers.

Demand weakness has spilled over to the current quarter due to floods, lack of new infrastructure projects by the government and the lull in housing real estate activity.

As a result, price hikes that were taken during April-May continued to be rolled back. A channel check of cement dealers by Kotak Institutional Equities showed that average all-India cement prices have fallen from 354 per bag in July to 347 in August. One cement bag weighs 50kg.

“After three months of consecutive price cuts, current cement prices are down 6% from May 2019 peak, whereas 2QFY20 prices are down 4% quarter-on-quarter," said Kotak Institutional Equities in a report on 20 August.

So, in the quarters to come, year-on-year growth in realizations will pale in comparison to what was witnessed in Q1. Considering the weakness in prices, JM Financial Institutional Securities Ltd has revised Ebitda estimates of cement producers under its coverage for the rest of the year, taking them lower by around 5%.

Of course, as indicated by company managements, some respite to margins is seen from softening prices of petroleum coke, coal and diesel. But that will help only to a limited extent.

Meanwhile, analysts are pinning their hopes on a demand revival in the second half of the fiscal year. According to them, cement companies will now shift focus from the trade segment, which helped pricing gains, to the non-trade (project) segment as government projects are expected to take off after the monsoon quarter. Trade cement is sold by companies to dealers, who in turn sell the product to consumers. Non-trade cement refers to goods sold by the producer directly to buyers, such as the government.

As such, they expect the current fall in prices to be contained. However, the spate of capacity additions cannot be ignored. Unless demand significantly improves and matches the increase in supply, the cement industry’s capacity utilization level would remain below 70%. So, price improvement, if any, may not sustain.

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