It’s too early to be happy about rising cement prices

Bombay : Investors in cement stocks can breathe a sigh of relief. The necessary price increases have taken place. In April, cement prices were up about 5% from March at the India-wide level, channel checks from cement dealers show. In some markets, the monthly price increase was more than 10%.

A bag of cement, weighing 50 kilograms, now costs 404 compared to 384 in March, according to a report from JM Financial Institutional Securities Ltd dated April 25. This surge was led by central India, which outperformed the north and west, with monthly prices jumping over 13%. The eastern and southern regions lagged with moderate to flat price movements, according to the JM report.

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In upward motion

Cement stocks were severely punished due to inflation fears. The inability of cement companies to adequately pass on the burden of high operating costs and the resulting squeeze on margins has led to significant downgrades in industry earnings. In this context, price increases are comforting.

However, it may be too early to rejoice. First, the industry would need another round of price increases to offset the full impact of cost inflation seen primarily in the second half of FY22. Even if this is the case, for their operational performance is improving significantly, cement prices should remain at high levels. At the same time, costs should also drop.

“Cost inflation has hit the entire industry hard, especially smaller manufacturers. Thus, the chances of a significant price drop are low,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. Bhadang is planning another 10-15 rise in cement prices in May.

“We expect the sector’s EBITDA/tonne to improve for 900-1,000/tonne in Q4 and Q1, but unlikely to reach earlier highs of 1,200/tonne soon,” he said. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

Another challenge cement makers could face is that high prices could hurt demand. Prices for other building materials, including steel and aluminum, also soared.

“Escalating construction costs are likely to limit cement consumption in the current fiscal year. likely to postpone their decisions to build houses,” said Hetal Gandhi, director of Crisil Research. This segment accounts for almost 60% of global cement demand.

The rating agency expects cement demand to grow 5-7% in FY23. This estimate takes into account the impact of escalating costs on rural housing and other segments. “A prolonged period of high construction costs may weigh on projected demand growth, pushing it below 5-7% in fiscal 2023,” Gandhi warned.

Costs remain high due to the current geopolitical crisis. Prices of key inputs such as imported coal and petroleum coke have risen about 50% in the past two months, analysts at ICICI Securities Ltd said in an April 26 report. Electricity and fuel costs are estimated to represent 25-30% of the sector’s total operating costs.

Additionally, diesel prices have started to rise since March and its impact on the industry’s freight cost remains to be seen. “While prices have been raised to mitigate these cost escalations, investors would seek more comfort as these costs correct to more ‘normalized’ levels,” the ICICI Securities report said.

In short, a significant rise in cement stocks and the sector’s earnings outlook is still a long way off. “The Street has significantly lowered FY23 earnings estimates for the sector, but we expect upgrades to FY24 estimates after cost pressures showed a significant reduction,” said Bhadang.

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