Cost Cuts May No Longer Drive Cement Makers As Demand Rises

Fuel and logistics costs are rising again and could impact pricing power. It comes at a time when cement consumption in urban areas is also returning to normalcy.

In the quarter ended September, according to a presentation by UltraTech Cement Ltd., “unprecedented” rural consumption and a pick-up in government spend on infrastructure aided demand. Cement consumption rose in all regions, except South and Maharashtra, India’s largest cement maker said. Even these two regions saw a better trend in September, ahead of the festival season.

Here’s how pan-Indian cement firms fared in the quarter ended September.

Rise In Volumes

UltraTech Cement’s volumes rose year-on-year for the first time in five quarters, led by incremental benefits following the integration with Century Cement.

HSBC Global Research said it had underestimated the industry growth and UltraTech Cement’s ability to reverse market share losses. Nomura Global Market Research increased volume estimates for UltraTech Cement by 10-11% over FY21-23 due to greater-than-estimated demand.

Steady Realisation

Realisation of cement makers remained largely unchanged—both year-on-year and compared with average estimates compiled by BloombergQuint—as a result of seasonal decline in prices.

Ambuja Cements’ realisation, however, was relatively better as the company, according to Citi, focussed on profitability and cash flows. And it also passed on the higher costs to consumers.

Cost Cuts

UltraTech Cement’s Ebitda per tonne rose 31% year-on-year in the second quarter. It was aided by lower power and fuel costs—such as those on petcoke and higher usage of waste heat recovery systems—and decline in fixed costs.

ACC and Ambuja Cements’ Ebitda per tonne rose to 10-year high in the second quarter.

Macquaire expects a three-pronged impact on operating costs of cement makers:

• Operating costs will likely normalise in the ensuing quarters as utilisations improve, which will also lead to a gradual pick-up in advertisement and other semi-variable costs.
• Higher diesel prices leading to higher freight rates, the full impact of which will reflect in the quarter ending December.
• Rising domestic petcoke prices, which are nearly 40% higher from their lows in June 2020.

Recovery In Demand

The cement makers’ earnings indicate demand recovery for the industry.

Emkay Share and Stock Brokers Ltd., in a note dated Oct. 17, said its channel checks indicated the recovery was initially led by rural demand, with infrastructure demand picking up later.

UltraTech Cement has guided for a year-on-year volume growth in the last three quarters of the ongoing fiscal. While ACC and Ambuja Cements’ haven’t commented on the demand, smaller companies like Sagar Cement said their volumes are growing and will do so on a month-on-month basis.

Ambuja-ACC Catching Up?

The combined performance of Ambuja Cements and ACC, on a per tonne basis, is catching up with UltraTech Cement, Investec Securities said in a note.

Per tonne pricing of the two companies fared better than UltraTech year-on-year, according to the brokerage, which reflects their focus on premium product sales, reduced discounting and chasing higher-priced markets.

HSBC Global Research, which recently raised target prices for ACC and Ambuja Cements, said competitive intensity has been decreasing between the two players due to production discipline or less-than-expected supply. A higher-than-expected rise in realisation due to strong demand, especially in south and east India, will drive profitability, it said.

Price Hikes Back

Companies across regions have hiked prices up to Rs 10-15 per bag in October, Nomura said in a note dated Oct. 13. While there could be a partial rollback, the brokerage said cement companies have shown better pricing discipline of late and with demand picking up, companies can sustain or hike prices further.

Most analysts have a ‘Buy’ rating on pan-Indian cement firms, suggesting a potential upside of 12-15% for them—with the highest being for UltraTech Cement.