It is too early to cheer cement price hikes
Premium- Cost inflation hit cement makers have announced much-awaited price hikes in April
- However, analysts caution that sustaining cement prices at elevated levels is key
MUMBAI : Investors in cement stocks can heave a sigh of relief. The much-needed price hikes have happened. In April, cement prices have risen by around 5% from March, at an all-India level, show cement dealers channel checks. In some markets, the monthly price increase has been more than 10%.
One cement bag, weighing 50 kilogrammes, now costs ₹404 compared to ₹384 in March, said a report by JM Financial Institutional Securities Ltd dated 25 April. This surge was led by central India, which outperformed the north and west, with monthly prices jumping more than 13%. The east and south regions lagged with moderate to flat price movements, said the JM report.
View Full Image
Cement stocks have been punished severely because of inflation concerns. Inability of cement makers to adequately pass on the burden of elevated operating expenses and consequent margin compression, has led to significant earnings downgrades for the sector. In this backdrop, price hikes are comforting.
However, it may be too early to celebrate. One, the sector would require one more round of price hike to offset the entire impact of cost inflation seen mainly in the second half of FY22. Even if it does so, for their operating performance to improve meaningfully, cement prices need to remain at elevated levels. At the same time, costs should also soften.
“Cost inflation has hit the entire sector, especially smaller manufacturers, hard. So, the chances of a meaningful roll back in prices are low," said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. Bhadang foresees another ₹10-15 rise in cement prices in May.
“We expect the sector’s Ebitda/tonne to improve to ₹900-1,000/tonne in Q4 and Q1, but it is unlikely to reach earlier highs of ₹1,200/tonne soon," he said. Ebitda is short for earnings before interest, taxes, depreciation, and amortisation.
Another challenge cement manufacturers may face is that high prices could hurt demand. Prices of other construction materials including steel and aluminium have also shot up.
MINT PREMIUM See All
“Construction cost escalation is likely to limit cement consumption in the current fiscal. The highest impact of cost escalation would be seen in the individual housing segment as customers are likely to postpone decisions to construct homes," said Hetal Gandhi, director, Crisil Research. This segment accounts for nearly 60% of overall cement demand.
The ratings agency expects cement demand to grow by 5-7% in FY23. This estimate factors in the impact of cost escalation on rural housing and other segments. “A prolonged period of high construction costs can weigh on forecasted demand growth, driving it below 5-7% in fiscal 2023," Gandhi cautioned.
Costs remain elevated because of the ongoing geopolitical crisis. Prices of key input materials such as imported coal and petroleum coke are up by around 50% over the last two months, analysts at ICICI Securities Ltd said in a report on 26 April. Power and fuel costs are estimated to account for 25-30% of the sector’s total operating costs.
Further, diesel prices have started to rise since March and its impact on the sector’s freight cost remains to be seen. “While prices have been hiked to mitigate these cost escalations, investors would seek more comfort as and when these costs correct to more ‘normalised’ levels," said the ICICI Securities report.
In short, a meaningful upside in cement stocks and the sector’s earnings outlook is still away. “The Street has significantly downgraded FY23 earnings estimates for the sector, but we expect upgrades to come in for FY24 estimates after cost pressures show significant reduction," Bhadang said.