Cement stock: Onset of monsoon may keep pricing and demand in check

Cement stocks have witnessed a downtrend in this seasonally strong June quarter. All major cement stocks such as ACC, Ambuja Cements, Shree Cement and UltraTech have hit 52-week lows last Thursday. Concerns over rising costs, and the fact that realisations are not keeping pace persist even when the volume growth is decent. This has weighed on investors' sentiment. With the next quarter seasonally weak, cement stocks may remain under check.

According to JM Financial's mid-June channel checks, the all-India average of cement prices per 50 kg bag stands at around Rs 321 in the June quarter. Although slightly higher than Rs 318 in the March quarter, prices are lower than Rs 333 in the year-ago period.

Volumes, however, have been growing, propelled by a surge in infrastructure activities, especially highways and metro projects. Hurdles over sand mining, affecting retail demand in majority of states (except Rajasthan), too, have been largely resolved. 

While rising volumes are positive, realisations play an important role given the surge in input prices. The June quarter started with pet coke priced at $120 per tonne, compared to $90-95 in the same period last year. Imported coal prices are following a similar trajectory. More importantly, domestic diesel prices are up substantially and will adversely influence logistic costs, which along with power form a big chunk of overall costs of cement companies. So, the Street's concerns on profitability appear valid.

Analysts observe that cement companies are looking at market share gains and hence the realisations have not kept pace with the rising demand. CLSA, in its recent note, has maintained that a few large cement players are opting for a 'volume chase' strategy at the cost of profitability. 

However, they also believe that with the larger ones operating at over 70 per cent utilisations, pricing discipline should re-emerge and reverse recent underperformance. 

However, there is some bit of optimism that others see. Binod Modi at Reliance Securities says while cement prices may be looking flat after the GST imposition since companies have stopped providing distributors bonus/discounts, there is some sort of comfort at current price levels. So, companies may end up maintaining their per-tonne profitability on a sequential basis.

While clarity will emerge once companies declare their June-quarter performance, the onset of monsoon would impact both demand and realisations given that July-September period is seasonally weak. While the near-term headwinds may persist, analysts in general remain positive about UltraTech and Shree Cement.