While local restrictions to contain a deadlier second wave of Covid-19 caused the demand for cement to shrink, commodity inflation-driven higher prices are likely to aid earnings in a seasonally weak quarter.
Cement volumes are estimated to decline by about 20% in the three months ended June compared with a normalised sequential decline of about 10%, ICICI Securities wrote in its first-quarter preview.
And demand may shrink even more given the varying degree of restrictions in different states in April-May.
Prices Up
While volumes fell, higher pricing in a slack quarter—partly coinciding with monsoon—is estimated to improve realisation. According to Kotak Securities, all-India prices rose sequentially, driven by spikes in the east, south and west. Overall, cement turned 4% costlier sequentially.
Margins
The average Ebidta per tonne is expected to rise 8-9% sequentially despite higher costs, according to ICICI Securities. Axis Securities, too, expects margins to be better-than-expected as prices are sustaining in the seasonally weak monsoon period, contributing to higher profitability.
Higher variable costs, however, are expected to keep some pressure on margins. Pet coke is up 14% sequentially, while imported coal and domestic diesel rose 15% and 16%, respectively, over the previous quarter in April-June, according to Bloomberg data. That would have increased the cost of production.
BloombergQuint awaits responses to queries emailed to Orient Cement Ltd., Shree Cement Ltd. and India Cement Ltd.
Shares of cement makers are up 7-58% (May 1-July 1) in expectation of a reasonable quarter. JK Lakshmi Cement Ltd. has been the best performer, while Shree Cement is the only cement company among peers to have declined. That’s because the stock is trading at more than 100% premium to five-year average valuation.
Cement stocks should remain supported even as valuations remain above long-term averages and volumes fall, evident more so due to a low base effect, said Rakesh Arora, managing partner at Go India Advisor. Mid-cap cement companies will outperform large-cap peers, according to Arora. Mid-sized companies sell cement at a bigger discount but when the cycle turns, the gap narrows and aids realisations, he said.
And analysts said the cycle has turned starting June.
Outlook
CLSA saw a demand recovery in June and expects a nearly 10% year-on-year growth in FY22 on a low base. April-June 2020 was the period of national lockdown. Rural independent home builders and infrastructure are likely to be the key demand drivers in the near term for the sector, with urban real estate likely to pick up with a lag, CLSA said.
The demand is expected to come from rural housing, followed by urban housing, said UltraTech Cement Ltd. in its June presentation.
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