For cement companies, the December quarter (Q3FY24) was a mixed bag. Price increases had to be partly reversed on weaker absorption during the latter part of the quarter. Indeed, overall realization growth was tepid. Demand growth has slowed.
According to Jefferies India, cement industry demand grew by around 5-6% yoy (yoy) during Q3FY24, slowing sharply from H1FY24’s 12-13% run. State elections, unseasonal rains in some regions and job visibility weighed on cement demand during Q3FY24.
Easing input costs brought relief last quarter. The prices of key fuels needed to produce cement, petroleum coke and imported coal have fallen from recent peaks. “Fuel consumption costs for cement players decreased 5-15% quarter-on-quarter (except for ACC and Ambuja Cements which reported a 1-2% quarter-on-quarter increase) to ₹1.50- ₹R2.05/Kcal in Q3FY24,” said a Motilal Oswal Financial Services report.
In Q4FY24, companies expect the cost of fuel to either remain flat or decline 4-5%, it added.
To save operating costs and reduce their carbon footprint, cement companies are increasingly adopting green energy and alternative fuels in their overall fuel mix. But the profits would gradually reflect the income of the sector.
In the short term, from a demand perspective, the quarter ending March is usually seasonally strong, but things could be different this time around. Demand is expected to be tepid in Q4 in the run-up to the national elections. The model code of conduct that is implemented before parliamentary elections tends to influence government spending on infrastructure and construction activities. So, Jefferies forecasts that FY24 is likely to end at around 9% yoy growth slightly lower than the previous estimate of 10%.
While demand prospects are not robust in the foreseeable future, price trends seen so far in the quarter have also been muted. Reports collected from broker dealers show that cement prices at an all-India level have not continued to higher levels so far in Q4FY24.
“Given that the industry missed out on pricing in Feb’24 (so far) and March-end is usually seen as a ‘volume-push’ month (to meet year-end targets), price recovery can now only be expected in Q1FY25. ,” said ICICI Securities report dated February 14.
Against the background of moderating demand, the industry’s aggressive capacity additions could weigh on the sector’s medium-term price outlook. Cement companies in regions like the eastern part of India are likely to face a higher burden of this demand-supply mismatch than others in terms of price improvements.
It is worth noting that an industry, UltraTech Cement Ltd, has revised its growth capital expenditure guidance to ₹9,000 crore per annum each in FY24/FY25 against earlier guidance of ₹6,000-7,000 crore.
Currently, as the battle between market share gains and realizations continues, margin improvement may not be enough to trigger a meaningful re-rating. The volatility in cement prices could keep marginal improvement in check.
In short, the threat of cuts to earnings estimates is lurking, at least for this quarter. “While revenue declines for Q4FY24E seem evident, the street may not touch FY25E/FY26E earnings yet with hopes of a revival in Q1FY25 (primarily April 2024 – key to monitor),” the ICICI Securities report added.
Meanwhile, the stock performance of key cement companies has been mixed so far this calendar year. Shares of UltraTech, Shree Cement and Dalmia Bharat were down 5-10%. On the other hand, ACC Ltd and Ambuja Cements Ltd collected almost 20% and 10% respectively. Estimates in terms of EV/Ebitda for FY25, between 11 and 18 times, Bloomberg data showed. Ratings do not provide comfort given the near-term concerns about demand and price prospects.