Resilient Fourth Quarter By Smaller Cement Makers Adds To Optimism
Small-sized cement makers reported an improvement in operating performance in the quarter ended March despite the Covid-19 disruption, driven by higher realisations, lower operating costs and fuel prices.
While mid-cap players, including India Cement Ltd., Ramco Cement Ltd. and JK Cement Ltd., are yet to report numbers, analysts cheered the strict capex discipline, improved operating metrics and positive commentary in the earnings announcements of smaller cement makers such as Birla Corp., Orient Cement Ltd., JK Lakshmi Cement Ltd, and Shree Digvijay Cement Co.
“Catching up with their larger counterparts, small-cap cement stocks have delivered a good show mainly as offtake was better than the street expectation amid firmed cement prices,” Ravi Soda, cement analyst at Elara Capital, told BloombergQuint.
Bigger players including UltraTech Cement Ltd., ACC Ltd. and Ambuja Ltd. also beat estimates on operational performance despite the loss of volumes because of the Covid-19 lockdown towards the end of March. Cost cuts and higher cement prices during the quarter helped. With better-than-expected performance even by the smaller cement makers, brokerages expect a faster rebound as demand has started recovering.
A Kotak Securities report said its dealer checks suggest volumes are returning with utilisation at 15-20% of last year’s level in April, and moving up to 35-40% in May. It said cement companies also increased prices by 10% over the previous month in May.
ICICI Securities said in a note that rural and semi-urban housing led to a recovery in demand in May and volumes are at 75-80 percent of what they were a year earlier. According to CLSA, demand has returned to 30-80 percent of normal in areas where activity is resuming, which explains the traction in small-cap cement stocks.
Small-cap cement stocks surged 15-35 percent after announcing fourth-quarter earnings, with Orient Cement and Birla Corp gaining the most.
Here’s how smaller cement makers fared in the fourth quarter and what explains the optimism:
Birla Corp.’s operating profit grew 20% year-on-year, aided by higher realisations and operational and tax savings, according to its exchange filings. Nirmal Bang said this was the second time in nearly 11 months that the company’s Ebitda/tonne, at Rs 1,044, has risen above Rs 1,000-mark.
Shares of the company surged by nearly a third in two days after it announced its earnings.
Motilal Oswal maintains a positive outlook as the cement maker plans to increase capacity by nearly a fourth over the next 15 months, which could aid volumes beyond FY22. “Birla Corp’s 55% capacity is in Central India (our preferred market), which should aid pricing and margin,” the brokerage said in a note. The stock trades at 4.4 times its estimated enterprise value-to-Ebitda ratio for FY22, a 30% discount to its 10-year average, making the stock attractive, it said.
JK Lakshmi Cement
Softening prices of pet coke, a key fuel for cement makers, market optimisation and lower logistics costs aided the earnings. The company, however, paused its capex plans and said it would continue to focus on deleveraging by repaying loans worth Rs 250 crore each in FY21 and FY22, according to its filings.
The delayed capex expansion in north India is expected to keep JK Lakshmi Cement’s balance sheet nimble, Centrum Broking said.
The company’s operating performance was driven by realisation gains, helping beat street estimates.
It now expects an overall decline in industry volumes of up to 20-30% over the previous year because of the Covid-19 disruption. That’s an improvement over its earlier forecast of a 45-50% drop. The change was aided by demand recovery in rural areas, according to Emkay Global, and is a key positive.
Shree Digvijay Cement
The company turned profitable and became virtually debt-free, according to its filing. Finance costs dropped 79 percent year-on-year basis, according to its press release.