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Rising energy cost pose a threat to earnings

Substantial rise in imported coal prices, petcoke prices too trend higher

There has been a substantial increase (up 75%/52%) in South African/Australian coal prices in the last one month (40-50% increase in two weeks).

At present, imported coal prices are significantly higher than their peak in Oct’21 (e.g. South African coal price stood ~USD300/t v/s its peak of USD248/t). Petcoke prices too have started to rise. Reliance Industries raised petcoke prices to INR17,980/t for Mar’22 (up 24% from Feb ’22 levels)

There will be a further increase in domestic/imported petcoke prices as Cement companies would want to maximize the usage of petcoke. At current prices, usage of petcoke will fall ~40% cheaper than imported coal prices (kcal cost of petcoke will be INR2.3/kg v/s INR4.1/kg for South African coal).

Earnings sensitivity to higher energy costs remains high

Operating cost/t for the Cement industry increases by INR41-52/t (~5% of 3QFY22 EBITDA/t) for every USD10/t increase in petcoke and imported coal prices. The industry will have to raise prices by ~INR3/bag to offset the impact of a USD10/t change in the coal/petcoke prices.

ed by an increase in coal/petcoke prices, average variable cost/t for our coverage companies rose by INR467/t over 1Q-3QFY22, which led to an 8.4pp decline in average gross margin as the industry was not able to pass on the rise in input costs. This, in turn, led to an INR490/t reduction in average EBITDA/t for our coverage companies in this period.

Apart from higher coal/petcoke prices, the recent increase in crude prices/ocean freight rates may further put pressure on operating cost for the industry. Higher crude prices may lead to a rise in diesel price, which will lead to higher freight costs (a 5% change in diesel price to impact opex by ~INR20/t).

Reduce earnings estimates to factor in higher energy costs in 1HFY23

In the current volatile pricing scenario for imported coal and changes in the global geopolitical scenario (Russia-Ukraine standoff), it has become difficult to analyze the earnings impact on Cement companies.

We expect higher coal/petcoke prices to sustain in the near-term and factor in an average coal/petcoke price of USD170-175/t in 1HFY23 (v/s our earlier expectation of a decline in coal/petcoke prices from 1QFY23).

Higher input cost assumptions led us to reduce our aggregate EBITDA estimate by 13%/7% for FY23/FY24. This, in turn, led to an 18%/10% reduction in aggregate profit for companies in our Cement universe in FY23/FY24. We factor in a gradual reduction in energy costs in 2HFY23 and a variable cost/t reduction of INR200/INR150 in 3Q/4QFY23.

Our aggregate EBITDA estimate post revision is 20%/12% lower than the Bloomberg consensus estimate for FY23/FY24. Our aggregate profit estimate is 29%/21% below Bloomberg consensus estimate for FY23/FY24.

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