UltraTech To Ambuja: Tailwinds That Are Set To Boost Cement Makers' Q3 Earnings
The tailwinds provide a scenario for a strong margin expansion in cement companies.
Shares of cement makers have surged up to 20% in the past month as investors bet on improved performance, aided by multiple tailwinds.
Most cement companies have added capacity, on their own and via acquisitions, as India's infrastructure push expected to boost demand for the key construction material. Rising cement prices and lower lower input costs are expected to further aid earnings in the ongoing quarter ending Dec. 31.
Cement Prices Rise
The average all-India price for the third quarter rose 4% so far sequentially despite a slight 1.4% month-on-month dip for November, according to data from brokerages. The average price was Rs 386.59 per 50-kg bag in the first two months of the third quarter, up from Rs 371.48 in the second quarter.
The uptick in prices will aid revenue of cement makers.
The price per bag increased most in the southern region at 6.8%, followed by the east and the north at 5.9% and 4.6%, respectively. The west and the central regions were stable with a growth of 2.9% and 0.2%, respectively.
Energy Costs Fall
Crude oil, pet coke, coal and diesel are used as fuel in cement kilns. On an average, power and fuel account for around 25–30% of the total cost for cement players.
Since Oct. 1, Brent crude dropped 14% due to market sentiment, weak global demand and demand-supply dynamics. Cheaper diesel and pet coke will bring down raw-material costs for cement players.
Diesel prices in India have held steady since May 2022 and prices of imported and domestic pet coke fell annually. The price of U.S. pet coke rose 3% month-on-month in November but is down 30% year-on-year.
Domestic pet coke fell 24% on year and 7% month-on in December to Rs 13,546 per tonne. Imported coal dropped 12% over the previous month in November and 46% year-on-year.
Efficient Cost Management
The companies have observed a significant drop in costs of logistics, and power and fuel in the first half ended September. In the second quarter, according to NDTV Profit's calculations, logistics costs fell an average 3% year-on-year and power & fuel costs dropped 22% for major cement makers.
These cost-optimisation efforts helped the companies improve the Ebitda margin and also post a growth in revenue and net profit.
Growth In Volumes
Sales volumes showed signs of robust demand in infrastructure and construction. On a yearly basis, Ramco Cements Ltd. saw the highest growth at 37%, followed by JK Cement Ltd. and ACC Ltd. at 22% and 17%, respectively.
December Boost
Motilal Oswal Financial Services Ltd. estimates industry demand to grow 6–7% in the third quarter.
While consumption rose in double digits in October, it declined 4–5% in November as construction halts during the festive season due to labour unavailability, the brokerage said in a note on Dec. 1.
The volumes are likely to improve in December due to strong demand from infrastructure, commercial capital expenditure and a recovery in individual housing and rural segments.
Margin Expansion
Falling costs and higher prices are expected to aid margins of cement maker, continuing the trend witnessed in the past year.
Shares of all the major firms, except ACC Ltd. and Dalmia Bharat Ltd., have surpassed analyst estimates, according to Bloomberg data.
Analysts say it's hard to tell whether all the structural upticks are fully priced in.
Nomura has upgraded its view on India's cement industry on account of potential stronger sales volume growth. The brokerage, according to its Dec. 27 note, expects a 5% volume CAGR over FY24-26 compared to 4% in the past decade.
It upgraded ratings of UltraTech Cement Ltd., Dalmia Cement (Bharat) Ltd., and The Ramco Cements Ltd. to 'buy' from 'neutral', with a one year forward price target of Rs 11,500, Rs 2,900 and Rs 1,250, respectively.
Nomura also increased Shree Cement's price target to Rs 33,400 apiece, while maintaining a 'buy' rating on the stock.
The brokerage expects a 2-3% year-on-year price hike for cement prices in FY25 as the industry looks to expand margins through realisation upgrade, amid demand moderation post-election. Decline in average pet coke and thermal coal prices by 35% and 45% year-on-year, respectively, will aid in expansion of Ebitda per tonne for the companies, it said.
