scorecardresearchQ3 Earnings Preview: Cement companies' woes likely to continue as input costs eat into profitability

Q3 Earnings Preview: Cement companies' woes likely to continue as input costs eat into profitability

Updated: 13 Jan 2023, 04:11 PM IST
TL;DR.
The raw material costs continued to remain a major concern for the cement sector for Q3FY23. The petcoke and coal prices in both domestic and international markets were still higher compared to the long-term average but corrected in the past couple of months.
Cement demand would be driven by a pick-up in the government projects in the infrastructure and housing domains.

Cement demand would be driven by a pick-up in the government projects in the infrastructure and housing domains.

Rising input costs are still clamping down on the cement sector. The net profit of major cement companies fell by 40-90 percent in the second quarter, and analysts are expecting a similar trend to continue in the third quarter of FY23. The cement industry has been experiencing high raw material costs since the start of the Russian-Ukraine war.

Domestic brokerage firm Reliance Securities in its results preview report noted that raw material costs continued to remain a major concern for the cement sector for the third quarter on YoY basis, while it expects some margin improvement sequentially.

The petcoke and coal prices in both domestic and international markets were still higher compared to the long-term average but corrected in the past couple of months. The pet coke prices corrected 40 percent from their peak to $170/tonne while imported coal corrected by 42 percent to $190/tonne, according to Reliance securities. 

The brokerage said the power and fuel cost per tonne for its coverage universe is estimated to increase by 24 percent YoY, though it would decline 9 percent QoQ, impacting profitability on a YoY basis, while it would add margin QoQ.

The pick-up in construction activity in the festive season and a favourable base will help cement companies report double-digit YoY volume growth in Q3FY23, it said. For companies under its coverage universe, Reliance securities expects volumes to grow by 10.3 percent YoY in 3QFY23.

The brokerage emphasised that volumes would have been greater if all cement makers hadn't raised prices to at least partially offset the intense input cost pressure.

Additionally, revenue will increase by 14.8 percent YoY, driven by stronger realisation and bigger volumes. However, EBITDA/APAT is expected to de-grow by 6.6 percent/27.5 percent YoY on account of higher operating costs, it added.

The 3QFY23 witnessed a decent 5 percent YoY and 2 percent QoQ growth in cement prices on a pan-India basis. "We expect the cement prices to improve further in the coming quarters as demand is likely to pick up going ahead and this will help the pricing trend to improve and thus recover the margins in the coming quarters," said the brokerage.

"Ambuja Cement is the only company under our coverage universe, which is expected to report a sub 4 percent decline in PAT on a YoY basis to Rs.2.4 billion due to a change in sales mix and focus on higher realization in the non-trade segment, along with lower input cost pressure as compared to other companies," Reliance Securities said.

In addition, the net profit of cement major UltraTech Cement is likely to decline by 27 percent YoY. Similarly, Shree cement and ACC are expected to witness a 46 percent and 35 percent YoY decline in APAT, respectively, due to higher input cost pressure.

Other cement companies including JK Cement and Ramco cements are expected to witness an 18 percent and 23 percent YoY decline in APAT coupled with higher fuel and raw material prices with an increase in other expenses, it stated.

Going forward, the brokerage anticipates energy costs for the cement industry to moderate after recording a peak in 2QFY23. The decline in raw material prices will only be reflected in company margins in the coming quarters.

Further, with rising construction activities, the brokerage anticipates cement demand to remain strong, spurred by an increase in government projects in the infrastructure and housing sectors.

The overall cement industry demand is expected to grow by 8 percent in FY23. Rising input costs along with sustainable demand and pricing remain key risks for the sector, it said. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

Article
Commodity prices and stock market
First Published: 13 Jan 2023, 04:11 PM IST