Cement stocks shine on improved earnings growth prospects in FY24

While UltraTech Cement, Dalmia Bharat Ltd, Birla Corp. and Star Cement Ltd saw their stock prices scale 52-week highs on Wednesday, Ramco Cements Ltd and JK Cement had scaled these levels on Tuesday. Shree Cement too is not far from its 52-week high. Among others, Adani group companies Ambuja Cements and ACC Ltd have rebounded from their March lows. Other cement stocks, too, are seeing gains.

During the March quarter, as per the data compiled by Mint for 49 cement manufacturers, although the adjusted net profit was down 7.9% on a year-on-year (y-o-y) basis, it more than doubled—up 164%—compared to the December quarter. A 46% rise in profit before interest tax depreciation and amortization on a sequential basis helped the net profits growth as higher other income further lifted the overall performance.

Companies like UltraTech and Shree Cement saw their Ebitda per tonne improve sequentially by ₹146 and ₹130 a tonne, respectively, as per calculations of analysts at Motilal Oswal Financial Services. Ebitda per tonne for UltraTech and Shree Cement stood at ₹1,049 and ₹1,011, respectively. Ambuja Cement and Dalmia Bharat were not far behind with per tonne Ebitda at ₹977 and ₹955, respectively and ACC saw an improvement of ₹58 a tonne to ₹549.

This was helped by a good demand scenario that translated into improved volume trajectory. The declining raw material prices provided a significant boost to profitability even though cement prices did not see much improvement.

The trend is likely to sustain in the ongoing quarter too, said analysts. With demand remaining strong, companies are expected to see volume growth pace continuing. Rajesh Ravi, senior analyst at HDFC Securities, said volume growth visibility remains strong, and cement sales volumes are anticipated to grow at 9-10% during FY24.

The demand outlook remains favorable during FY24 with the government spending on infrastructure likely to propel growth. The ongoing quarter (April-June), that is seasonally strong for construction activities, is anticipated to see much higher volume growth. Cement demand in the ongoing quarter remains favorable across regions, said Mangesh Bhadang, research analyst at Centrum Institutional Research. Volume growth thereby will remain strong in the ongoing quarter with April-May likely to have seen double-digit volume growth.

Costs too are expected to see further decline during the ongoing quarter with pet coke and coal prices expected to have fallen further.

Operating cost per tonne for cement industry changes by ₹40-50 a tonne for every $10 a tonne movement in pet coke and imported coal prices, as per analysts at Motilal Oswal.

After a continued increase in coal and petcoke prices, the average variable cost for companies under Motilal Oswal coverage had increased by 55% over Q1 FY22-Q2 FY23. The imported coal prices however, corrected by 45-59% in the past six months—17-24% since the end of March—and pet coke prices corrected 23-35% in the past six months, and 17-26% since the end of March.

This decline in coal and pet coke prices is likely to boost profitability of cement producers during the ongoing quarter and even the next quarter. While power and fuel costs had decreased by ₹190 a tonne during previous quarters, Bhadang expects further decline of ₹200 a tonne in the ongoing quarter. This will lead to profitability improvement and Ebitda per tonne for many more companies crossing ₹1,000 a tonne level.

Even Ravi of HDFC Securities expects up to ₹300 a tonne improvement in profitability for cement manufacturers. Ravi expects ₹100 a tonne profitability improvement to be passed through to customers and cement prices to remain at similar levels, while ₹200 a tonne will be the visible profitability improvement.

Favorable fuel prices, strong demand will support earnings, said Motilal Oswal analysts. Based on variable costs and cement price movements over the past few months, they estimate the average spread in Q1 FY24 for trade sales (cement price net of GST—variable costs) to be ₹130-140 a tonne higher than the Q4 FY23 average, mainly driven by softening of fuel prices.

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Updated: 07 Jun 2023, 10:58 PM IST