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Cement Q4FY22 Preview: Demand improving; cost inflation stays a concern

ICICI Securities 08 Apr 2022

What’s Buzzing:

In the backdrop of steep cost inflation and high base of last year, cement companies are likely to report a subdued performance during Q4FY22E.

Context:

Key input components like international petcoke/coal (~27% of total costs) have seen unprecedented rise since February 2022. The Q4FY22 average prices of International coal are up 14% vs. Q3 average due to Russia-Ukraine crisis while current rates of coal/petcoke are up another 23% and 25% QoQ, respectively.

Perspective:

Given the high base of last year that witnessed 24% YoY jump in sales volumes, Q4FY22E is likely to witness flat sales volume YoY while it would improve 16.3% QoQ to ~61.3 MT for our coverage universe. Improved ground level activity after muted Q3 is expected to act as a key trigger for sequential sales volume growth. In terms of costs, petcoke, coal and diesel prices have seen unprecedented rise since February 2022 onwards due to geo-political tensions. However, the sector is expected to witness only marginal impact of fuel cost inflation during Q4FY22E as the industry normally operates with two to three months of fuel inventories. With average 2% increase in cement prices, our I-direct cement coverage universe is expected to report flat QoQ EBITDA/t while it will be sharply lower by 26% on YoY basis. To mitigate the full impact of cost inflation from Q1FY23E, players have again taken price hikes in the range of Rs 20-40/bag across all regions from April 2022 onwards, which, we believe, would sustain and take care of incremental margin pressure from Q1FY23E onwards. Overall, we maintain our positive stance on the sector from a long-term view as current elevated levels of international coal/petcoke prices are unsustainable while positive demand outlook continues to stay intact in our view.

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