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10-09-2022 10:06 AM | Source: ICICI Direct
Cement Sector Update: Cost pressure at its peak; margins to bottom out in Q2 By ICICI Direct
News By Tags | #223 #3961 #3062

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We expect operating margins in the cement sector to get further squeezed in Q2FY23 as the impact of higher international petcoke/coal would be fully visible. Also, a moderate pricing environment due to monsoon is expected to lead to 530 bps QoQ fall in margins to 12.2% (i.e. at multi quarter low levels). On positive side, sales volume for our coverage universe is expected to grow 11.2% YoY. Region wise, performance of north, west based companies to stay relatively better in terms of pricing while east, south region may report better sales volume YoY. While profitability for Q2 is likely to remain at multi quarter low, we expect margins to recover from Q3 onwards on softening of international fuel prices, pick-up in construction activities (post monsoon) and a better pricing environment.

Cement demand to grow in double digits YoY…

We expect our cement universe sales volume to grow 11.2% YoY to ~54 MT. Region wise, south and east are likely to report better volume growth compared to other regions this quarter owing to lower rainfall in the eastern region, pick-up in infrastructure projects in south India coupled with last year/s low base effect. The key thing to watch would be comments on the demand recovery post festive season along with the ramp-up of infrastructure projects in run-up to the general election in 2024.

…cost pressure at its peak; expect moderation from Q3 onwards

Domestic, international (US, Saudi Arabia) petcoke prices have fallen by ~30%, 40%, respectively, from their peak in June, May 2022. Also, cement companies have now started sourcing cheaper petcoke from Russia and Venezuela vs. expensive South African/Australian coal/petcoke. Diesel prices are also currently 6% lower than the average price in Q1FY23. However, given the presence of high cost fuel inventory in the system, we expect production cost to rise further by | 137/tonne QoQ (up 3% QoQ)

Cement prices rise in Sep’22; Q2 average prices still down 4% QoQ

Cement prices witnessed marginal improvement during September 2022 in most regions. However, average cement prices for Q2FY23 may remain down 4.1% QoQ (or down by | 17 to | 383/bag) due to unfavourable pricing movement in July, August 2022. Central, East India are likely to report QoQ fall of ~6% while rest of the regions may witness price average correction of ~3%. On YoY basis, all India prices are likely to be up ~3% with central & south region reporting gain of ~5.1%, 4.8%, respectively.

Average EBITDA/t to decline 32% QoQ to | 690/tonne

Q2, being the seasonally weak quarter in terms of volume, is expected to witness highest cost pressure given the presence of high cost fuel inventory in the system. Hence, we expect EBITDA/tonne of our coverage universe to decline further by 32% QoQ to | 690/tonne (down 42.7% YoY).

 

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