Higher prices, lower costs to cushion Cement firms in June quarter

South India led the recovery, with prices up 17% sequentially and 5.6% YoY
Shares of cement manufacturers UltraTech Cement, ACC, Ambuja Cements, and Shree Cement have rebounded 16-25 per cent since their May lows.

While low demand during the lockdown weighed on investor sentiment, a better-than-expected recovery in the same, following the unlocking of economy, along with firm realisations, has again revived sentiment.

Channel checks by analysts such as Binod Modi of Reliance Securities suggest that though demand in June was at 60-70 per cent of normal levels, it had grown 10-50 per cent over May.

 
Realisations, helped by production and pricing discipline, improved in April and May. Interestingly, though June has historically seen corrections before the onset of monsoon, all-India average cement prices were still up 7.6 per cent sequentially and 2 per cent year-on-year (YoY), at Rs 335-340 per 50-kg bag for the month, said analysts. 
South India led the recovery, with prices rising 17 per cent sequentially and 5.6 per cent YoY. Other regions saw prices improve 2.4-9.8 per cent sequentially.

Prices of inputs like coal and petcoke were also down, which was another positive. Though there will be some rise in logistics costs — led by rising diesel prices — analysts at Jefferies say variable costs, which form the bulk of the cost base, should broadly stabilise (sequentially).

 

 
At the same time, the industry’s efforts to reduce discretionary costs like advertisement, commissions, repairs, corporate expenses, etc are likely to pay off well.

Overall volumes in the June quarter, however, will decline. Sanjeev Kumar Singh at Emkay Research expects an aggregate volume decline of 30.3 per cent YoY for firms under his coverage. Nevertheless, he expects average Ebitda per tonne — a profitability indicator — to improve 5.7 per cent sequentially to Rs 1,142. 

Despite demand woes, analysts at Jefferies expect Ebitda (of firms in their coverage) to average at over Rs 1,200 per tonne. This, according to them, is the second-highest level in at least 30 quarters.
While the realisation-led operating performance is a positive for now, sustainability of the trend in demand and prices over the next few months, too, are crucial, considering the monsoon season.

Though recovery in demand is likely during H2, labour availability and control over coronavirus hold the key.

For now, analysts are generally positive on UltraTech, given its expanded capacities. They say that even if further expansions are delayed by the present challenges, it will not impact UltraTech’s volume growth.

However, the same is not true for ACC, for which the Street has factored in the commissioning of 5.9 mt of capacities in eastern India, by end-2020. Among other firms, JM Financial is positive on Shree Cement and JK Cement.


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