Higher Energy Costs May Dampen Cement Makers’ Quarterly Gains

Increased energy costs may partly offset cement makers’ gains from higher prices and a better demand in the quarter ended June.

The government’s infrastructure thrust will boost volumes after two quarters of subdued performance, ICICI Direct said in its pre-earnings note. The number of infrastructure projects awarded in the April-May period rose 59 percent year-on-year, the brokerage said.

Morgan Stanley expects industry volume growth at 3-4 percent despite distributors reducing stock ahead of the GST and early onset of monsoon.

The top eight listed cement companies’ net sales may grow 14 percent, on an average, in the quarter and net profit is likely to rise by a percent over the comparable three months last year, according to Bloomberg consensus estimates.

Earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to grow 18.15 percent year-on-year. Excluding Orient Cement, the aggregate operating profit of the top seven companies would fall to 1.98 percent, according to the consensus of analyst estimates tracked by Bloomberg.

Besides Orient Cement, much of the growth could be witnessed by north-based-players such as Shree Cement and JK Lakshmi Cement. Sales of pan-India players like ACC and UltraTech Cement could also rise more than 10 percent year-on-year, HDFC Securities said in its pre-earnings note.

Key Risks

ICICI Direct expects cost pressures to continue on account of an increase in pet coke prices and higher freight costs.

Elevated valuations factoring in substantial increase in profitability and a higher risk associated with demand growth, especially from real estate, keeps HDFC Securities cautious on the sector.

Factors To Watch

• ACC: Update on merger synergies with Ambuja Cement
• Ultratech Cement: Expected profitability and utilisation due to acquisition of JP Associates’ cement business.
• Ambuja Cement: Update on merger synergies with ACC
• Shree Cement: Announcement on clinker capacity addition
• Ramco Cement: Fuel cost movement, as Ramco is the only company not to have seen any fuel cost inflation in the past year.
• Orient Cement: Updates on the acquisition and funding of JP Associates’ assets
• JK Lakshmi Cement: Volume growth given capacity expansion at Durg unit along with higher cement demand
• India Cement: EBITDA per tonne due to lower margins in Trinetra Cements and higher power cost

ACC: First Off The Block

ACC is expected to report a 15.3 percent growth in net sales to Rs 3,309 crore for the quarter ended June led by higher volume growth, according to Bloomberg consensus estimates.

Strong demand in the east combined with capacity addition in the region is expected to lead to higher volume growth for the company, according to ICICI Direct.

EBITDA growth of 13 percent is expected to be driven by an increase in realisation and operating leverage benefit.

Net profit is expected to rise 15 percent to Rs 274.2 crore led by better performance at the operating level.