A good season ahead for cement companies with price hikes

• Cement prices dipped by 2.5% in April-August with a trend reversal in September.
• The industry has a poor track record of withstanding sharp price hikes beyond a few months.
• If the hikes come through and sustain, a potential earnings upgrade is on the cards, say analysts.

The Indian cement sector saw good growth in demand and profitability in the first half of the year. In a further boost to sentiments, the sector’s realizations might also improve as it’s likely to see pricing-led growth as well.

The sector saw weak pricing growth across most regions this calendar year, with a few even seeing a drop. On a pan-India basis, prices dipped by around 2.5% between April to August 2023. But September has seen a trend reversal.

East India has seen two price hikes with one in September and yet another announced in October.

“With East India as a flag bearer, we gather that North and Central India have recently attempted hikes of ₹10-15 per bag and there prevails a ripe expectation of a sharp spike in South and West India for October 2023,” says a research report by ICICI Securities.

Analysts are keeping a close eye on how these hikes will be absorbed by the market with minimum impact on demand. The industry has a poor track record when it comes to withstanding sharp price hikes beyond a few months.

“We are watchful of the price trends. If the hikes come through and sustain, there exists a potential earnings upgrade risk to our estimates,” says ICICI Securities.

Most cement stocks have seen a correction in the last few weeks along with a broader correction in the markets. This is an opportunity to buy in, say analysts.

“UltraTech and Dalmia continue to be our top picks and we like Ramco and Nuvoco in the mid-sized space,” says a report by DAM Capital. Motilal Oswal picks J K Cements in the midcap space due to better growth plans, and J K Lakshmi Cements in small cap space due to attractive valuations and regional presence.

Source: BSE

The demand levers

The first half of FY24 saw healthy demand growth of around 13-15%, according to Crisil. As expected, July demand was hit by heavy rains but it rebounded strongly in August due to low rainfall and strong underlying demand.

“Cement volume is estimated to be up around 7% year-on-year in July; whereas, it is likely to be higher by 10-12% year-on-year in August,” says a report by Motilal Oswal Financial Services.

The government’s infrastructure push combined with increased activity in urban and rural housing is expected to keep demand strong. Government’s infrastructure spending accounts for around 30% of annual cement sales, while the housing segment accounts for around 55%.

Crisil expects India’s cement demand to grow 10-12% year-on-year to around 440 million tonnes in FY24.

Crude and competition

Good demand combined with price hikes can help the sector withstand the crude oil price rally seen in the last three months. Power and fuel costs constitute 30-35% of the sector’s total production cost. Rising fuel prices will also add to transportation costs of this sector, and tends to catch up, albeit with a lag effect.

Yet, structural problems also exist. A major concern has been aggressive capacity expansion plans by Adani-owned cement companies like Ambuja and ACC. It can affect the supply-demand dynamics of the sector.

Added to that, competition is already high in the South markets and players have been aggressively pushing to make a dent into the volume share in the market.

“This significantly dragged profitability for South-based companies, both on absolute and relative levels. We believe the aggressive volume push strategy and current levels of profitability in the South are unsustainable, which in turn should drive mean reversion of pricing,” says DAM Capital.

Apart from pricing growth, the sector’s fortunes are also tied to a possible slowdown in government spending on account of general elections. Uneven monsoons and their impact of rural housing demand will determine the sector’s topline and bottomline growth.

$ORIENTCEM.NSE looks very good for long term Investment. On its charts its showing inverse head and shoulder pattern. One Should accumulate it after continious close above 190 for the target of 340-350

— (@prabhatmittal1) September 27, 2023

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