Cement companies exit Q4 with flat prices, risk of margin erosion remains high
Premium- In the backdrop of the steep cost inflation that the cement sector is battling with, muted trend in prices is a bad news
Cement prices have been hiked marginally in the month of March in certain pockets but remain stable at an all-India level. Dealers channel check by Kotak Institutional Equities shows that prices were raised by ₹1, ₹4 and Rs8 per bag in the North, West and Central India. One cement bag weighs 50 kilograms. On the other hand, prices in the South and East have seen a dip. On an average, one cement bag now costs ₹377 compared to ₹376, said the Kotak report dated 17 March.
"Historically, cement prices increase 3% quarter-on-quarter (q-o-q) in 4Q; whereas 4QFY22 prices, so far, are up 1% q-o-q, mainly led by East and are struggling to rise despite strong seasonality," added the report.
In the backdrop of the steep cost inflation that the sector is battling with, muted trend in prices is a bad news. The cost of key inputs petroleum coke and imported coal is still an elevated level. Also, with petrol and diesel prices expected to be revised higher, the sector's freight cost may shoot up as well. So, investors should brace for a poor operating performance by cement makers in the March quarter.
"Our analysis of the past two input cost inflation cycles (FY11-12 and FY18-19) shows that cost increases were passed on within 3-4 quarters. However, given a much higher increase in input prices this time around, the pass-through may take longer, in our view," analysts at Emkay Global Financial Services Ltd said in a report on 16 February.
Since power and fuel cost account for around 25-30% of the cement industry's total operating cost, the dent on operating margins could be steep, now that price hikes have not played out as expected and that too in a seasonally strong quarter. This has kept stocks of key cement makers under pressure in the past few weeks. Fears of a further downward revision in earnings has dampened investors sentiment towards this sector.
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According to analysts at Kotak Institutional Equities, weak demand in 4QFY22 is the key reason behind stagnant prices and with commodity costs having risen amidst geo-political tensions would keep margins under pressure in 1HFY23. "We see significant downside risk to consensus estimates," cautioned the domestic brokerage house.
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