![](\"https:\/\/im.rediff.com\/money\/2023\/jan\/11cement-industry1.jpg?w=670&h=900\")
<\/p>\nCement companies witnessed speculative support from investors through FY23 amid hopes of a rebound.<\/p>\n
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After capex announcements in the FY24 Budget, there was further interest due to expectations that government expenditure would boost earnings, besides a generic macro-recovery.<\/p>\n
Cement earnings were under pressure in FY22 and FY23 due to high raw material and fuel costs; muted demand prevented them passing on the higher cost.<\/p>\n
Fuel prices are now moderating, which may reflect in earnings of cement companies going forward, once high-cost inventory is mopped up.<\/p>\n
Imported coal prices have corrected 45-60 per cent in the past six months and petcoke prices have corrected 23-35 per cent.<\/p>\n
Petcoke import prices have eased by over 30 per cent and domestic petcoke prices are also likely to reduce further, since these are at a premium to imports.<\/p>\n
Indian Oil Corporation already cut petcoke prices by 11 per cent in May 2023 over April 2023.<\/p>\n
This should lead to improved margins for cement companies with spreads per tonne improving with a lag through June onwards, as companies consume high-cost inventory.<\/p>\n
According to a sensitivity analysis, operating cost\/tonne for the cement industry changes by Rs 40-50 per tonne for every $10 per tonne change in petcoke and imported coal prices.<\/p>\n
The average variable cost for cement companies increased 55 per cent over Q1FY22-Q2FY23, which meant a 15 per cent contraction in the gross margin.<\/p>\n
Consequently, average Ebitda\/tonne fell to Rs 569 in Q2FY23 against Rs 1,401 in Q1FY22, before recovering to Rs 875 in Q4FY23.<\/p>\n
Cement companies usually hold fuel inventory of 45-50 days, hence there’s a lag in impact on margins.<\/p>\n
Cement demand remains strong and volumes are estimated to have grown in low double digits (about 10 per cent) year-on-year (YoY) in April-May 2023.<\/p>\n
Higher volume growth is driven by the government’s thrust on infrastructure development, improved demand from private capex due to pick-up in commercial and industrial activities and real estate, and improved traction in retail.<\/p>\n
Management of most companies have guided for strong volume growth (between 10 per cent and 20 per cent) in FY24.<\/p>\n
Cement prices remained largely stable in March-May 2023.<\/p>\n
Most cement companies do not expect downside pressure on cement prices given strong demand, and in recent earnings calls, managements were confident that prices are likely to remain stable.<\/p>\n
The average spread appears to be up Rs 140 per tonne quarter-on-quarter (QoQ) in Q1FY24.<\/p>\n
The industry perspective is positive given a better demand outlook, led by the government’s push for infrastructure development and increasing housing demand.<\/p>\n
There’s potential consolidation in the industry and cost efficiency measures, such as installation of green power plants, and focus on product premium branding.<\/p>\n
Most of the majors have good balance sheets with low debt-to-Ebitda ratios.<\/p>\n
The enterprise value\/ Ebitda ratios are expected to be in the mid-teens to early 20s for FY24.<\/p>\n
Companies like UltraTech , Shree Cement, ACC, and JK Cement declared improved Q4FY23 results with strong sequential and YoY revenue expansion and volume growth.<\/p>\n
UltraTech continues with its capex plans, sos does Shree. Ambuja Cements and ACC have been a cause of concern due to negative publicity around the Adani group but the company has ordered new equipment and says it is committed to its capex plans.<\/p>\n