IGI Logo

Bumpy ride ahead?

Contrary to Street’s expectations, Q1FY24 results for cement companies, under our coverage, have largely disappointed with QoQ drop in EBITDA/t. Hereon, we highlight the risks of – a) likeliness of Q2FY24 EBITDA/t taking a further dip (owing to low operating leverage and cement price weakness); b) caution against assuming Q2FY24 prices as the bottom (historically, prices have dipped QoQ in Q3 and Q4 as well); c) high odds of weak demand in FY25 (given high base of FY24), which can stimulate competitive intensity further; d) race for FY26 capacity addition having kick-started and e) fuel cost having bottomed out with the recent rise in global pet coke rates. Overall, the above arguments suggest a bumpy ride ahead for cement sector. We stay cautious.

Q1FY24 results have largely disappointed

Given the miss on realisations (down 0.5-2% QoQ) and underappreciated fuel cost savings (variable cost/t down just ~INR 60), Q1FY24 result season is trending as ‘largely disappointing’ with QoQ drop in EBITDA/t. Given the low realisation base, current cement price weakness (except North India) and low operating leverage, estimate EBITDA/t to dip further QoQ in Q2FY24 as well.

Q2FY24 need not be the bottom for cement prices

The pricing weakness in the monsoon quarter of Q2FY24 need not be the bottom for cement prices in FY24. Historically, prices have slipped QoQ in Q3 as well. More recently, the prices trended negative in Q4 too (in Q4FY23 despite strong demand). Falling fuel cost may dither price hikes, watch out!

Pre-election ‘pull’ to post-election ‘lull’; risk to FY25 demand

Impact of heavy monsoons notwithstanding, demand in pre-election year (FY24) likely to stay firm at >10-12%. However, we point to the risk of demand being muted in FY25E – similar to FY20 (down ~2% on a high base of 13% surge in last pre-election year of FY19). With another >34mtpa of fresh capacity addition, pricing competition may intensify in FY25 should demand fail to pick up– more so in an easing fuel cost environment. We advise caution.

Capacity addition race for FY26 has kick-started

With formal capacity addition announcement by Shree Cement and Dalmia Bharat, guidance by industry leader UltraTech Cement to announce phase III of its expansions soon and expected additions by Adani Cement, the race for FY26 capacity built-up has already started. We expect industry to add >40mtpa capacity in FY26E.

Fuel cost: Bottomed out? Pet coke prices have risen of late

While the Street has been visibly rejoicing the steep fall in the prices of pet coke and thermal coal, these seem to have bottomed out since nearly a month. Prices have been on the rise since past two weeks, challenging fuel cost savings anticipated for Q4FY24.

Overall, we believe, the arguments still favour a cautious view on the sector. We maintain REDUCE on UltraTech Cement and Shree Cement; SELL on India Cements and HOLD on Ambuja Cements & Orient Cement. Maintain ADD on ACC & Grasim. JK Cement is the only BUY reco under our coverage.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

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