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Seasonally weak quarter hit by fuel cost

The performance of cement companies was affected adversely by lower prices and volumes due to seasonality. Higher power & fuel cost had an additional impact in Q2, but the effect was lower than expected due to usage of low cost inventory by most producers. Heavy rains in the East and transporters’ strike in Chhattisgarh hit the eastern region the most in Q2FY22. Average volumes were lower by 3-9% QoQ (JK Cement, Ramco Cement and Heidelberg were exceptions, with QoQ volume growth while Ultratech recorded flat QoQ volume) and cement realization dipped by 1.3% QoQ on weak demand amid seasonality, with the sharpest drop in the South and the East. Average EBITDA/t fell by ~Rs218/t (16%) QoQ and EBITDA by 17% for our coverage universe, which is better than expected. On a YoY basis, average EBITDA/t fell by Rs157/t (12%) but EBITDA fell by just 2% due to higher volume and prices.

Lower volumes and prices hit revenue

Heavy rains in September hit the already weak quarter, and as a result, we observed 3- 9% QoQ decline in volumes for most of the cement companies under our coverage. JK Cement, Ramco Cement and Heidelberg were exceptions, with QoQ volume growth, while Ultratech recorded flat QoQ volume. Star Cement, having exposure in the East, was severely affected (volume declined by ~19% QoQ). On a YoY basis, except Shree Cement and Star Cement, all companies recorded volume growth. Average cement prices were lower by 1.3% QoQ (fall was lower than expected) amid weak demand. As a result of lower volume and prices, average net sales of cement companies under our coverage fell by ~1% QoQ.

Low cost fuel inventory restricted margin decline

On an average, pet coke and imported coal prices increased by Rs2,500-3,000/t QoQ. Additionally, diesel prices too moved up by ~5% QoQ. This hit the margins of all companies. However, due to low cost coal inventory, the hit on margins was lower than expected. Average cost has increased by ~Rs147/t (3.7%) QoQ and ~Rs357/t (9.5%) YoY. Lower prices, lower volumes, and higher fuel cost led average EBITDA/t to decline by ~Rs218 (~16%) QoQ and Rs157 (12%) YoY for companies under our coverage. EBITDA declined by ~17% QoQ and 2% YoY.

View: Price hikes to offset cost increase in Q3

The price hikes in October (average price hike of Rs15-25/bag in the South, West and North and up to Rs10/bag in the East) and resumption of volume growth with the end of the monsoon and festive season should help offset higher power & fuel cost. As a result, profitability of cement companies should increase QoQ in Q3FY22. We have a BUY rating on Ultratech Cement in large caps, and Orient Cement and Star Cement in small caps.

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