IGI Logo

Cost pressure dips operational performance

Q3FY22 for cement companies witnessed subdued performance due to combination of factors such as low demand due to unseasonal rains, lower construction activities amid spread of Omicron virus and labour unavailability. The profitability was further affected due to sharp increase in coal cost which producers were unable to pass on due to lower demand. Average cement volumes were down ~3% YoY but up 8% QoQ on seasonally low base. Average operating cost increased ~9% (Rs348/t) QoQ/~18% (Rs666/t) YoY against increase in average cement realisation, up Rs93/t QoQ/Rs367/t YoY. This resulted average EBITDA/t declining by Rs255/t and ranges between decline of Rs77-686/t QoQ with highest for Ramco Cement and least for JK Lakshmi cement. JK Cement reported 13% QoQ higher EBITDA/t.

Demand Slowdown hit realisations; volume up QoQ on lower base

The cement demand witnessed slowdown in November 2021 due to unseasonal rains, delay in return of labour after Diwali and lower construction activities amid spread of Omicron. As a result, the price hike in October was rolled back in November and December 2021 and average realisation/t increased ~2% QoQ. Due to low seasonal base, cement companies’ volumes increased 7% QoQ but was down 3% YoY

Increase in CoP led to EBITDA contraction

The sequential decline in EBITDA (average EBITDA/t down by Rs255/t; 22.8% QoQ) was due to higher input cost inflation primarily high coal cost which increased cement average CoP by Rs348/t (~9%) QoQ. The average imported coal prices (Indonesia thermal coal price) during Q3FY22 was up ~USD47/t (35.4% QoQ) to USD181/t (Q3FY21 average: USD55.5/t). This led to rise in average power & fuel cost by Rs156/t (~14%) QoQ for all cement companies, while STAR Cement surprised with decline in cost QoQ. The impact was offset by low cost coal inventory to certain extent. The average raw material cost/t was up by Rs176/t (23.5% QoQ) while average freight cost was flat QoQ amid all India average diesel prices stood flat QoQ during the quarter.

View: Margins to increase QoQ but remain lower YoY in Q4FY22

From mid-January’22 onwards, construction activities have picked up leading to improvement in cement demand in February’22. As a result, cement companies are expected to witness volume growth on a sequential basis. Producers have increased prices too which are sustaining and will help in offsetting coal cost pressure to a certain extent. Coal prices are expected to be at elevated level for some more time. We expect cement margins to increase on a QoQ basis but should remain lower on a YoY basis due to flat volume (on high base), higher coal prices which should more than offset increase in cement prices. We have a BUY rating on Ultratech Cement and ACC in large caps, and Orient Cement and Star Cement in small caps

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer