Cement companies’ Q2 profitability to surge on strong volumes – ET Infra


A strong year-on-year growth in volume, along with lower cost of power and fuel is seen boosting earnings of domestic cement producers in the September quarter, with average profitability of the industry seen surging by at least 50% compared to the previous year, said analysts.

While operating margins are seen lower on a sequential basis due to weak seasonality, they could rise by as much as 400 600 basis points on an average year-on-year, with ACC and Ambuja Cements clocking in the best improvement.

“ACC and Ambuja would witness higher EBITDA expansion due to low base while we expect Ultratech, Shree Cement and Dalmia Bharat to see a margin expansion in the range of ₹212-250/t,” Systematix Institutional Equities said.
Spending by a few key states ahead of their elections this year, and the impending elections at the Centre has kept the demand for cement robust with an estimated year-on-year growth of 12-14%, they said.

Market leader Ultratech Cement has seen a 16% year-on-year growth in its consolidated sales in the September quarter, with volumes of 26.69 million tonnes.

“Institutional demand was more robust, driven by increasing construction activity in most regions. In addition, both central and state government infrastructure projects executed well,” Axis Securities said in a pre-ear nings note.

The cost of power and fuel, meanwhile, is seen lower by around ₹100-150 per tonne as compared to the previous quarter. The September quarter is typically weak for cement-makers given that monsoon rains hinder construction activities. Scanty rainfall across the country, especially in August and September, though, has resulted in the September quarter turning out to be stronger than usual, especially in terms of volume and pricing.

“Recent price hikes across India show that the Indian cement industry is maintaining pricing discipline despite strong demand. Usually the industry shows discipline during times of low demand, like monsoon quarter, as demand becomes inelastic to pricing,” Nomura Financial Advisory and Securities said.

Helped by price hikes taken later during the quarter, cement prices averaged at around ₹370 per 50 kg bag, which is about 2.5% lower as compared to the June quarter. Last year, cement prices in the September quarter were over 5% lower as compared to the June quarter.

While cement companies are seen sustaining volume growth and pricing power for another quarter or two, their profitability is seen under pressure given the recent surge in fuel prices.

There is a need for further price hikes given the recent uptick in fuel costs, CLSA Asia Pacific Markets said, maintaining a “cautious” view on the sector because of elevated valuations.

“We could consider turning constructive on the sector if we were to see a sustained weakness in fuel costs, driving up consensus expectations,” it said.

  • Published On Oct 18, 2023 at 02:02 PM IST

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