What Fuelled The Latest Cement Stock Rally

Shares of cement makers gained at least 15 percent since February as cost pressures abated and volumes grew in a seasonally strong quarter aided by the government’s push for infrastructure.

Stocks of large-cap companies, including Ultratech Cement Ltd., ACC Ltd. and Shree Cement Ltd. rose between 15 percent and 20 percent, while cement makers based in south India like India Cements Ltd. and Ramco Cements Ltd. gained between 20 percent and 30 percent.

Here’s why shares of cement companies gained in the past two months.

Lower Costs

Freight, power and fuel costs—which together contribute over half to operating expenses of cement companies—declined in the recent past.

Lower Petcoke, Imported Coal Prices

Domestic pet coke prices declined 5 percent over last year and 13 percent sequentially for the March-ended quarter. Imported coal prices, too, have slid by 11-12 percent on sequential as well as annual basis.

Current pet coke prices are lower than the average price for the quarter ended September 2018, and companies are expected to realise the cost benefit in the March quarter, CIMB said in a note on the cement sector in February. Cement companies normally carry 45-60 days’ inventory, it said, adding: “But with pet coke forming more than two-thirds of the fuel mix of the companies, expect the full benefits to accrue in 4QFY19 and thereafter.”

UBS’ global commodities team expects coal prices to reduce marginally in 2019 and 2020, lowering cost pressure for cement firms relying on imported coal in their fuel mix.

Citi agreed. “Petcoke has corrected from the peak; rupee appreciation is favourable and most major players continue to focus on efficiency improvements such as waste heat recovery, lower power consumption and lead distance management,” it said in its preview for the cement industry for the fourth quarter. “This implies abating cost pressures for the cement industry.”

Declining Freight Rates

The cement industry can reduce freight costs by 3-5 percent due to the changes in axle load norms, Morgan Stanley said in a recent report. Diesel prices have slid 3-4 percent on a sequential basis, as per Indian Oil Corporation Ltd.’s data, easing freight rates as most cement companies rely heavily on road transport.

Industry In Sweet Spot: Ultratech Cement

The industry is in a sweet spot due to improving demand, rising prices and falling costs, Ultratech Cement said at an investor presentation in February. It pegged the demand on the industry at 87 million tonnes compared with a capacity addition of 52 million tonnes over the three years through March 2021. Industry utilisation, Ultratech said, would improve to 75 percent by FY21 compared with 65 percent and 69 percent in FY18 and FY19, respectively.

The company also said it expects the industry’s Ebitda margin to rise to the “highs” of the quarter ended March 2018—around 24-25 percent—and likely sustain.

It also said demand would grow at 10 percent in FY20 in case of a continuity of government, or 7-8 percent in case of a change. Ultratech Cement also said that infrastructure demand is growing at around 20 percent, with even demand from rural areas being strong.

Improved Margins

Cement makers are expected to report higher margin for the quarter ended March 2019 both on an annual and sequential basis due to price hikes, increased demand, reduced cost pressures. Margins remained depressed over the past few years due to many reasons, prominent among which was a slowdown in the real-estate sector.