Cement companies are girding for tougher times as rising fuel costs bite

• India Inc is still facing the burns of the rising inflation, thanks to the ongoing Russia-Ukraine conflict bumping up the cost of the fuel.
• Now, even the cement industry has to prepare itself for a strained quarter as the production may get even more expensive in the July-September quarter.
• Investors should be prepared for lower EBITDA margins for cement companies.
• The profitability of cement companies may be at risk in the absence of any price hike.

The recent increases in cement prices are unlikely to translate into gains for the cement companies. Investors should be prepared for lower operating margins for cement companies like UltraTech Cement, Shree Cement, JK Cement and others in the July-September quarter.

According to the latest report by ICICI Securities, cement prices in the northern and central regions of India are likely to be 9-10% higher in the second quarter of fiscal year 2023 compared to last year. East and west India may witness 6-7% increase in July-September, compared to last year, while the prices in south India may remain flat.

Cement prices recorded an increase of ₹15-₹17 per bag in January-February across India, peaking at ₹390 per bag. The prices marginally reduced by ₹3 per bag in March. In the April-June quarter, all-India average cement prices were up by ₹25 per bag.

Like in the previous quarters, cement companies will be impacted by higher input costs of pet coke, diesel, energy and freight in the July-September quarter too.

The major cause for this price increase is the rise in fuel prices, which enhances the cost of cement production. The report also noted that the combination of a 10 percent correction in pet coke prices, cement companies importing coal from low-cost destinations like Russia, and their rising cost efficiencies due to green energy initiatives – using alternate fuel and raw materials (AFR), and waste heat recovery system (WHRS) — may see costs peak by Q2.

Higher realisations are likely to offset the overall increase of nearly ₹300 per tonne in costs, HDFC Securities said.

However, the profitability of cement companies may be at risk in the absence of any price hike as the overall cost per metric ton would increase on a quarterly basis. These changes in the overall cost will also be applicable in the July-September quarter, even though the cost was 3% lower than average in the April-June quarter.

The increase in the price of cement will eat into the margins of cement companies, leading to reduced EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins.
Source: ICICI Securities

“Grasim Industries is likely to report standalone EBITDA increase of 38.5% year-on-year to ₹10.25 billion owing to strong profitability in chemicals divisions and better quarter-on-quarter margins in VSF with ramp-up of new capacities. Grasim’s consensus FY23- 24E earnings may be upgraded, in our view,” ICICI report added.

The brokerage firm added that UltraTech Cement and Shree Cement remained its top picks, while they also liked JK Cement and JK Lakshmi Cement.

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