Cement Sector Update : Price hikes partially offset cost impact; spreads key monitorable by Emkay Global Financial Services Ltd
As highlighted in our previous report (Likely price hikes to soothe cost wounds) and basis our latest channel checks, cement prices have improved by Rs10-12/bag (Rs200-220/t), with the hikes being absorbed across regions since last week. Such price hikes partially offset the cost impact (~Rs400/t), as imported pet coke/coal and packaging material (PP bags) have continued to trade at similar levels for the past three weeks, with the looming threat of a potential hike in diesel rates (~Rs5/ltr) in May-26. Checks showcase probability of further price hikes of ~Rs10/bag if cost pressures harden. On the demand front, besides the usual slackness observed in the first week of April, momentum remains upbeat, particularly in the non-trade segment. Cement stocks have recovered some lost ground on the back of the recent price hikes. However, we believe cement spreads remain the key monitorable and determinant for mean reversion of valuation multiples. We continue to favor UTCEM and JKCE/SRCM in the evolving geo-political situation. We also like STRCEM, on account of its negligible dependence on imported fuels.
Input costs – Sticky at elevated levels
There is no price softening in imported pet coke or coal as they continue to trade at ~USD160/t and ~USD130/t, respectively, since the past three weeks. Packaging bags (PP/HDPE bags) are available at Rs15-18/bag (~2x since the outbreak of the US-Iran war). Further, checks highlight a looming threat of diesel price-hikes from May-26 which would result in Rs25-40/t cost inflation (assuming Rs5/ltr hike in diesel rate). Overall, we still see a cumulative cost impact of ~Rs400/t in Q1/Q2FY27E, and extrapolating current levels of input cost.
Price hikes partially offset the cost impact; more hikes in the offing
To mitigate the rise in cost, the industry has been seeing price hikes of up to Rs10-12/bag (~3.5% or Rs200-220/t) across regions and segments since last week which have been successfully absorbed. On average, trade and non-trade prices have improved by Rs10-15/bag and Rs15-20/bag in the non-trade segment, respectively. We believe such price hikes would partially offset the cost impact, as operational costs remain elevated. Checks highlight probability of further hikes of ~Rs10/bag (only in May), if cost pressures harden.
Steady demand
Besides the usual slackness observed in the first week of April (due to higher channel inventory owing to sales push in the last week of March), demand momentum remains upbeat, particularly in the non-trade segment.
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