Shares of cement companies have corrected sharply in the current month so far, following disappointing June quarter performance that fell short of street estimates. Earnings were adversely affected by weak pricing and low volumes.
Cement prices have been falling due to intense competition as major firms aggressively compete for market dominance, this competition has prevented price hikes despite rising raw material costs, leading to a significant drop in EBITDA per ton during the June quarter.
Volume growth was impacted by the general elections and heatwave, which engendered the unavailability of labor and the early onset of monsoon in some regions. Following the weak set of numbers, analysts have also trimmed their earnings estimates on the stocks, which further added pressure on the stocks.
In the current month so far, shares of Shree Cement have fallen by 11%, while those of ACC, Ambuja Cements, and Sagar Cements have dropped by 10.4%, 8%, and 7%, respectively. Other stocks, such as Dalmia Bharat, JK Cement, and Ramco Cements, have tumbled in the range of 2%–5% in August so far.
According to Nuvama Institutional Equities, 11 major cement companies started FY25 on a weak note, reporting approximately 4% YoY volume growth in Q1 FY25 and 8% decline quarter-on-quarter (QoQ).
During this quarter, ACC, Shree Cement, and Ultratech Cement led in volume growth, with increases exceeding 6% YoY. However, profitability was impacted by several factors: realization prices fell by about 2.5% QoQ and 5.5% YoY; power and fuel costs increased by around 4% QoQ but decreased by 16% YoY; freight costs rose by approximately 1% QoQ but fell by 5% YoY; and other expenses, including staff costs, went up by about 7% QoQ and 1% YoY, as per the brokerage.
Consequently, EBITDA per ton dropped roughly 19% QoQ and 9% YoY to ₹832. The brokerage anticipates that fuel costs will either remain stable or decline further in Q2 and Q3 FY25, with prices for imported petcoke and non-coking coal down about 3% and 1%, respectively, from the average Q1 FY25 levels, which should provide some relief.
The brokerage channel checks and management commentary during conference calls reveal that prices have continued to decline in all regions in July 2024 compared to the Q1 FY25 average. It expects further dips in realizations for Q2 FY25, with limited prospects for substantial price hikes until Q3 FY25.
Overall, the sector's near-term sentiment appears subdued due to weak pricing and expectations of modest volume growth for FY25.
Nuvama Institutional Equities expects FY25 to experience mid-single-digit volume growth, with the second half of the fiscal year anticipated to perform better than the first half. This growth is projected to be driven by increased demand in the real estate sector and the government's emphasis on infrastructure spending.
The brokerage notes that softening fuel prices (with a lag effect) and various cost-efficiency measures implemented by companies will help mitigate the negative impact of weak realizations to some extent.
Nuvama remains cautious about the sector overall and recommends a ‘BUY’ rating for JK Cement and ACC. It advises a ‘Hold’ rating for UltraTech Cement, Ambuja Cements (downgraded from ‘Buy’ due to high valuations), and Shree Cement. Additionally, the brokerage suggests a ‘Reduce’ rating for India Cements.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
