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Cost pressure stays

Q4FY22 for cement companies witnessed gradual rebound in cement demand particularly during Feb and Mar 2022 which led to higher volumes but average realisation were largely flat QoQ. Despite coal/pet coke prices at elevated levels, higher operating leverage and old inventory at lower prices aided average CoP to fall marginally and result in margin improvement QoQ. Average cement volumes (for coverage companies) were up 16% QoQ/ flat YoY on high base. Average operating cost were marginally down ~1.2% QoQ/ but up ~12% (Rs437/t) YoY against average cement realisation remaining flat QoQ/up Rs275/t YoY. This resulted average EBITDA/t increasing by Rs100/t QoQ and ranges between increase of Rs80-262/t QoQ with highest for JK Lakshmi and lowest for ACC. However, we witnessed companies like JK Cement and Shree Cement which reported 13% and 10% QoQ lower EBITDA/t respectively. The cement companies in April 2022, raised cement prices by average ~Rs15/bag (higher in north by average Rs20-25/bag and increase in South by Rs10- 15/bag) to pass-on cost inflation to some extent. However, the sustaining of price hike need to be monitored (reversed part of increase in May) as demand is slowing down in key markets. Apart, rising coal prices remain area of concern due to inability to passon fully to customers. Hence, we lower our EBITDA estimate for coverage companies by average 21%/13% for FY23E and FY24E respectively.

Demand improvement led to increase in volume QoQ

The cement demand witnessed gradual improvement in Q4FY22 amid seasonally good quarter along with subdued Q3FY22 which led to higher capacity utilisation levels and improvement in sales volume. The overall volume was up by average 16% QoQ. The cement prices saw marginal increase in Jan’22 which was reversed to large extent in Feb and then again increased towards March end 2022. This led to average cement prices remaining almost flat QoQ. As a result, average revenue of coverage companies was up 16% QoQ.

Benefits of operating leverage helps in EBITDA expansion QoQ, higher fuel cost hit margins YoY

The sequential increase in EBITDA (average EBITDA/t up by Rs100/t; ~12% QoQ) was largely due to higher volumes and decrease in average CoP by Rs52/t (~1.2%) QoQ due to benefits of operating leverage and usage of old coal/pet coke inventory. The average imported coal prices (Indonesia thermal coal price) during Q4FY22 was up ~USD5/t (3% QoQ) to USD183.5/t (Q4FY21 average: USD82.7/t). This led to rise in average power & fuel cost by Rs39/t (~3%) QoQ, while degree of change is mixed within coverage companies. The highest increase was in Heidelberg cement, up 17% QoQ, while JK Lakshmi cement witnessed decline in cost by ~19% QoQ as impact was offset by low cost coal inventory to certain extent. The average raw material cost/t was down by Rs35/t (3.4% QoQ) while average freight cost was flat QoQ.

View: Margins to remain under pressure in 1HFY23

The demand is slowing down in May and will witness monsoon soon. As a result, cement companies are expected to witness lower volume QoQ in Q1FY23. Coal prices are expected to be at elevated level and will increase further in Q1FY23. The cement companies increased prices during April 2022 but is not sufficient to cover increase in coal/pet coke prices. The inability to pass-on cost fully to customers remains the primary concern. We expect cement margins to decrease on a QoQ basis due to lower volume, higher coal prices which should more than offset increase in cement prices.

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