Higher Prices, Better Demand To Offset Cost Headwinds For Cement Makers
Cement makers registered volume growth and were also able to raise prices in a systematic manner as the economy opened up.
As India began to emerge from a virus-induced lockdown, economic activity gained momentum. And cement makers were not only able to sustain growth in volumes in the first quarter since then but were also able to raise prices in a systematic manner.
Demand for the key construction material rose following growth in rural incomes amid a good rabi crop and the good monsoon that has resulted in high levels of groundwater across the country and better sowing in the kharif season.
Government schemes, specifically the MGNREGA, PM Garib Kalyan Rozgar Abhiyan and several state-level schemes like Matir Srisht in West Bengal and public work schemes in Jharkhand, and infrastructure projects have aided demand, according to Ritesh Shah, an analyst at Investec Securities.
The brokerage expects cement volumes to grow by 12% year-on-year during the second half of the ongoing fiscal compared with 6% contraction in the first half. Motilal Oswal, too, projected similar figures for the second half in a report, compared to 5% year-on-year growth in the second quarter.
Growth Pockets
Recovery in volumes would be led by north, East and Central India, as weakness remains in the South and West, according to Motilal Oswal’s channel checks. Volumes in the northern and central regions are being driven by pent-up demand and resumption of government spending, while volumes in the east would be supported by governments in Bihar, West Bengal and Assam, the report said.
HM Bangur, managing director of Shree Cement Ltd., however, thinks the northern region “is yet to catch up”, adding he expects eastern and central regions to drive recovery due to pent-up demand and lower levels of urbanisation compared to southern and northern regions.
Yet, Bangur isn’t bullish about the industry as he expects demand to range between 4% and 5%—the same as a year ago—as the Covid-19-induced lockdown affected sales towards the fag end of the last fiscal.
He expects demand to sustain in the individual housing segment, especially in rural areas, which is experiencing reverse migration as work from home becomes the norm at offices, and increased social spending by the government. He sees “very little green shoots” from the non-trade, or infrastructure, segment.
Sanjay Ladiwala, a cement industry analyst, agreed. While rural demand is strong, infrastructure demand is catching up but the recovery in urban areas seems far away due to absence of orders from large real estate players, he told BloombergQuint.
Pricing Discipline
Cement makers have shown better pricing discipline of late. CLSA’s channel checks show prices hardening across regions in October, indicating better realisation in the third quarter. The brokerage suggested in a note that prices in most regions have risen by Rs 5-15 per bag over September. Motilal Oswal, too, said in a note that prices have risen by 0.8% sequentially so far in the third quarter across India compared with a 0.7% to 1.1% quarter-on-quarter decline in the past 5-10 years. Prices have risen by nearly 7% over the third quarter last year to Rs 360 per bag.
Here’s what companies said about pricing.
Cost Challenges
However, not all’s well for the industry as costs of inputs like petcoke—which were low till the first half of the ongoing fiscal—have started increasing.
Birla Corp. said cement makers are expected to face significant cost pressure as prices of petcoke and other key fuels rise. Macquarie expects the full impact of higher diesel prices leading to higher freight rates to reflect in the quarter ending December.
High Profitability
Yet, Nirmal Bang expects the Ebitda per tonne of cement makers—a key metric for profitability—to rise to a record not just in the third quarter but also in FY21. Putting a number to it, CLSA expects the metric to rise 14% year-on-year in FY21 for most companies as prices increase and efficiencies offset cost headwinds.