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Higher Coal cost dents profits on a YoY basis

The seasonally good quarter have seen gradual improvement in cement demand with March 2022 saw stronger demand recovery. As a result, we expect average sales volume to be up by 16% QoQ/flat YoY. Cement companies pushed volumes and able to match last year’s volume despite being higher base in Q4FY21. However, market was not supportive of price hikes and as a result, we expect average price hikes of 1-2% QoQ/~8% YoY which was not enough to pass on higher coal cost. Due to old inventory, we forecast average coal price to be up marginally and due to higher volumes, the profitability would improve on sequentially basis (EBITDA/t to increase by 9.6% QoQ at Rs945), however down 21.3% YoY of our coverage universe.

Higher volumes and marginal price hike increases topline QoQ

The demand revival from subdued Q3FY22 was gradual with March month saw strong demand recovery leading to volume growth of 16% QoQ/flat YoY of our coverage universe. On a YoY basis, JK Lakshmi, Ramco and Star Cement is expected to report YoY volume growth. During the quarter, most of cement companies have taken gradual price increase leading to average price increasing by Rs50-100/t QoQ during the quarter. Orient Cement’s realisation is expected to be flat QoQ while Shree Cement might witness average realization to be down by Rs80/t QoQ.

Fuel cost to be marginally up QoQ but up 40% YoY, hitting profitability

Prices of key raw materials like pet coke averaged at Rs17,761 down Rs1,550/t (8%) QoQ while imported coal prices witnessed sharp rise in February and March 2022 but average was up by 3% QoQ at USD184/t. Higher volume will help in offsetting power cost and as a result, we expect average cost to flat QoQ but up~Rs590/t YoY. Marginal higher prices and flat operating cost would lead average EBITDA/t to increase by ~Rs83 (~9%) QoQ/but down ~Rs256/t (21%) YoY for companies under our coverage.

View: High coal cost continue to hit profitability

Imported thermal coal prices have risen further and currently hovering at USD275/t (fell from highs of uSD450/t) v/s Q4FY22 average of USD184/t. Global thermal coal prices are also expected to remain elevated for few more months. Cement companies have been trying to increase cement prices to offset rising fuel prices. However, with higher steel prices, it would be difficult for cement companies to take major price hikes (fear of demand slowdown) which can offset the cost increase. As a result, profitability is likely to take hit QoQ in Q1FY23. We prefer to invest in large caps with Ultratech Cement as top pick.

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