BackCement volumes continue to rise in May, but rains to play spoilsport
Analysts have a cautious outlook on the cement sector looking at cost headwinds posed by higher fuel costs
PremiumNEW DELHI : Demand for cement picked up in the June quarter, the peak season for construction before monsoon, in a piece of good news for manufacturers struggling with high input costs.
As per data from JM Financial Institutional Equities, cement volumes transported by rail in May 2022 were 2% higher than in April, and up 30% from a year earlier. The year-on-year growth is also likely to have been helped by the previous year’s lower base due to lockdowns.
Volumes in May were also 3% higher than average volumes in January-February 2022, though March volumes are lumpy and not comparable. The cement volumes are likely to have grown well in May, too.
Volume growth can drive operating leverage at a time cost headwinds remain high. However, the approaching monsoon season may cap volume growth in the coming months as construction activities slow down during rains.
Analysts already have a cautious outlook on the cement sector looking at cost headwinds posed by higher fuel (coal and pet coke) costs and also higher logistics costs. Earnings for the March quarter and FY22 hold testimony. UltraTech, India’s largest cement manufacturer, saw consolidated revenue rise 18% y-o-y in FY22, led by a 9% and 8% increase in sales volume and blended realization respectively. However, the 14% y-o-y increase in per tonne operating expenses led to a decline in operating margins, while Ebitda remained flat. The story was no different for others. Dalmia Bharat saw a 20% rise in expenses while the prices improved by just 3%.
The Jefferies report said, “Cement coverage reported inline y-o-y Ebitda decline (20%) for QFY22, on cost pressures. Volumes were flat y-o-y, while grew 17-18% q-o-q, driving Operating leverage led q-o-q uptick in unit Ebitda." However, they added that price hikes are lagging cost increases, and they believe it may take another quarter or two for price growth to exceed costs. In the near term, the seasonally weak period of monsoons begin, stock prices may see consolidation.
Not surprisingly, experts maintain a cautious view. Deepak Jasani, head of retail research at HDFC Securities Ltd, said that in cement, cost pressures will continue to pose headwinds for manufacturers. Cement makers have increased prices several times in the last few months as demand picked up. However, price improvement continues to lag with soaring costs. Besides, more price hikes will hurt demand. The coming monsoon may further dampen demand and keep profitability and earnings under check," added Jasani.
Monsoon being around the corner means a possible recovery in earnings will happen only in the second half of the fiscal year.
A similar view is echoed by other experts.
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