The June quarter earnings of the cement sector came mixed as inflation hurt margin. Volume improved but profit remained subdued.
The headwinds for the cement sector still persist even though the demand environment looks better due to a pick-up in infrastructure projects. Some brokerages believe commodity costs have peaked which should result in easing cost pressures from the third quarter of FY23.
The Q1 show
Brokerage firm Kotak Securities said the volume of cement companies under its coverage increased 16.6% year-on-year (YoY) but slipped 6.8% quarter-on-quarter (QoQ) in Q1FY23 on a Covid-impacted base while realizations increased 6.7% YoY and 5.3% QoQ, led by front-ended price hikes.
Costs increased 20.7% YoY and 6.9% QoQ primarily on higher fuel costs. EBITDA/ton declined marginally on a sequential basis (-1.6% QoQ, -30% YoY) as higher costs were largely offset by higher realizations, Kotak said.
The Q1FY23 earnings of cement companies were characterized by higher-than-expected costs, which were offset by higher-than-estimated realizations. Hence, the overall impact on EBITDA/mt was negligible, brokerage firm Nirmal Bang pointed out.
EBITDA margin for the sector (aggregate of 16 companies) was down 921bps YoY and 118bps QoQ. Key factors that led to the margin pressure were: (1) elevated coal and pet coke prices and (2) inadequate increase in pricing.
Nirmal Bang said cement companies have improvised as far as their sourcing strategies are concerned by: (1) using the most cost-effective sources of coal like low calorific value Indonesian coal, and Russian coal (2) switching largely to petcoke and (3) increasing the usage of AFR (Alternate Fuels and RMs).
The road ahead
Kotak Securities expects margins of cement companies to see a significant sequential correction in Q2FY23, led by a combination of 3-4% lower realizations and higher energy costs due to consumption lag. However, firm prices and cost deflation should help recover margins in the second half of FY23E.
"Consensus EBITDA estimates have seen 8-10% correction in the past three months and our estimates are now in line with consensus for FY2023-24E. Cement stocks have rallied by 15-20% in the past two months and current valuations suggest limited upside," Kotak said.
The brokerage firm has a sell call on Shree Cement and Ramco Cements.
Brokerage firm Nirmal Bang said within its coverage universe, Star Cement, Ramco Cement, Ultratech and JK Cement delivered positive surprises on earnings whereas ACC and JK Lakshmi were surprised negatively.
"Overall, the decline in EBITDA/mt for the sector was lower than earlier expectations and given the receding commodity costs, the outlook for the second half of FY23 is better. The only concern we now have is the possibility of competitive intensity within the sector affecting profitability," said the brokerage firm.
Ultratech, Birla Corp and JK Lakshmi Cement are the top picks of Nirmal Bang in the sector.
Brokerage firm Motilal Oswal Financial Services has raised the aggregate EBITDA estimate for its coverage universe (excluding JK Cement) by 4.6%/3.7% for FY23/FY24, respectively.
Dalmia Bharat has seen an upgrade of 10%/2% for FY23/24, followed by 9%/5% for Grasim and 8%/7% for Ramco Cements, respectively. India Cements and ACC have witnessed downward revision in EBITDA estimates, Motilal Oswal said.
"Aggregate profit estimate for our coverage universe (excluding JK Cement) has been revised up by 4% for FY23/FY24 each. We have downgraded ACC and Ramco Cements (given their expensive valuations) to 'neutral' from 'buy' and India Cements to 'sell' from 'neutral' given its continuous market share loss, lack of clarity over expansion plans and high leverage," Motilal Oswal said.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.
