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Price cuts continue despite favorable seasonality

Our dealer checks suggest that cement price cuts continue in March 2024, the fifth consecutive month of price declines. All-India prices are down by 5.2% qoq in 4QFY24 as per our checks, led by East and South. Demand remains robust and we expect 7-8% industry demand growth in 4QFY24E. We see operating margins for cement producers to have hit a near-term peak in 3QFY24 and expect margins to contract in 4QFY24 notwithstanding marginal energy cost deflation and operating leverage. We trim earnings and FV across coverage and see downside risk to consensus earnings for FY2025-26E. SRCM and TRCL are our top SELLs in the coverage.

Dealer checks: Prices cuts in March mark fifth consecutive month of cuts

As per our checks, all-India prices declined further in March 2024 by Rs7-8/bag on average (or 1.7%). Price decline in March 2024 is the fifth consecutive month of sequential price cuts after the last hike in October 2023. We estimate 5.2% qoq price decline in 4QFY24 majorly led by South and East. Competitive intensity among large players to gain market share and cost deflation have been the key reasons behind price weakness. Among regions, South/East saw the highest declines by 8%/6% qoq whereas Central/West/North saw ~1%/4%/5% declines qoq in 4QFY24.

Demand—remains robust in 4QFY24E

Our channel checks suggest that cement demand remains robust across regions with an exception of a few states in the Eastern region. Infrastructure and real estate segments continue to drive demand whereas bunched up holidays during the quarter resulted in better labor availability. We estimate industry to witness 7-8% qoq demand growth in 4QFY24E and end FY2024 with ~8.5% yoy growth. Capacity addition at 7% yoy lagged demand growth resulting in utilization increasing marginally to 69% in FY2024E. 

Cost deflation to continue to aid margins

Both international thermal coal/pet coke prices remain subdued and prices in 4QFY24E are ~15%/10% qoq lower. Inventory lag should continue to drive energy cost deflation for cement companies over the next few quarters although majority of the benefits have been absorbed until 3QFY24. Additionally, diesel prices were cut by Rs2/liter after 20 months in March 2024 should marginally reduce freight cost from 1QFY25.

Price weakness to keep margins under pressure and drive downgrades

We see 3QFY24 operating margins for cement producers as a near-term peak. We expect margins to contract in 4QFY24E on sequential basis, an aberration in seasonally strong 4Q, led by unseasonal price cuts only partly offset by cost deflation and operating leverage. We trim earnings and Fair Value across our coverage factoring the recent weakness in cement prices. Our EBITDA estimates for FY2024-26E are ~5% lower than consensus and we expect consensus downgrades. TRCL and SRCM are our top SELLs in the coverage

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