Thursday, September 21, 2023

Cement companies are gearing up for tougher times as rising fuel costs bite

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  • India Inc continues to suffer the burns of rising inflation, thanks to the ongoing conflict between Russia and Ukraine that is pushing up the cost of fuel.
  • Now even the cement industry must prepare for a tense quarter as production could become even more expensive in the July-September quarter.
  • Investors should be prepared for lower EBITDA margins for cement companies.
  • The profitability of cement companies could be jeopardized if no price increase takes place.

It is unlikely that the recent increases in cement prices will translate into profits for the cement companies. Investors should be prepared for lower operating margins for cement companies such as UltraTech Cement, Shree Cement, JK Cement and others in the July-September quarter.

According to the latest report from ICICI Securities, cement prices in India’s northern and central regions are likely to be 9-10% higher than last year in the second quarter of fiscal 2023. East and West India may rise 6-7% in July-September compared to last year, while prices in South India may remain stable.

Cement prices rose across India by 15-₹17 per bag in January-February, peaking at ₹390 per bag. Prices have been marginally reduced by ₹3 per bag in March. In the April-June quarter, average cement prices across India increased by ₹25 per bag.

As in previous quarters, cement companies will continue to experience higher input costs of petcoke, diesel, energy and freight in the July-September quarter.

The main cause of this price increase is the increase in fuel prices, which increases the cost of cement production. The report also noted that the combination of a 10 percent correction in the prices of pet coke, cement companies that import coal from low-cost destinations such as Russia, and their mounting cost savings from green energy initiatives – using alternative fuel and raw materials (AFR), and waste heat recovery system (WHRS) — may see a peak in costs by the second quarter.

Higher realizations are likely to offset the total cost increase of nearly 300 per tonne, according to HDFC Securities.

However, the profitability of cement companies could be in jeopardy if no price increase takes place, as the total cost per tonne would increase every quarter. These changes in total costs will also apply in the July-September quarter, although costs were 3% lower than average in the April-June quarter.

The cement price increase will affect the margins of cement companies, leading to lower EBITDA margins (earnings before interest, taxes, depreciation and amortization).

Company Projected EBITDA in July-September 2022 Impact on EBITDA margins (year-on-year) Telephone call
UltraTech cement ₹27.3 billion -17.6% To buy
Shree Cement ₹8.4 billion -16.8% To buy
Dalmia Bharat ₹5.6 billion -19.5% To add
NUVOCO ₹3.5 billion -31.6% To buy
India Cement ₹600 million -63.8% To sell
Ramco Cements Ltd ₹2.6 billion -28.2% To add
JK Cement ₹3.6 billion -13.2% To buy
JK Lakshmi cement ₹2.1 billion -1.6% To buy
Orient Cement Ltd ₹1.1 billion -41.2% To add
Prism Johnson Ltd ₹1.47 billion 0% To add
Heidelberg Cement India ₹1.05 billion -20% Delay

Source: ICICI Securities

“Grasim Industries is likely to report a standalone EBITDA increase of 38.5% year-over-year to 10.25 billion due to strong profitability in its chemicals divisions and improved quarter-over-quarter margins in VSF with ramping up of new capacities . Grasim’s consensus FY23-24E earnings may be upgraded in our view,” the ICICI report added.

The brokerage firm added that UltraTech Cement and Shree Cement remained their top picks, while also liking JK Cement and JK Lakshmi Cement.

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