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Cement Sector Q3FY23 result Review : Margin curve on upward trend; anticipated price hikes to propel profitability further!

ICICIdirect Research 22 Feb 2023 DISCLAIMER

What's Buzzing: 

Cement players in Q3FY23 started witnessing an improvement in the margin curve (on a sequential basis) as power and fuel prices took a breather post the sharp rise during Russian-Ukraine crisis in H1FY23. The pricing environment remained steady as realisations were flattish QoQ to Rs 5737/t (up 4% YoY). With healthy volumes, coupled with declining cost of production (down 3% QoQ), EBITDA/ton improved 29% QoQ to Rs 764/t (but still down 19% YoY). 


On account of healthy underlying demand, cement players witnessed strong volume offtake. Capacity utilisation improved 460 bps YoY to 80%+. Volumes grew 13% YoY to 59.4 MT. Eastern region saw the highest price increase during Q3FY23 while prices in north remained muted. Demand in both regions grew double digit YoY (low base effect). On the cost front, pet coke prices on a per Kcal basis declined 20% QoQ to Rs 2.3/Kcal. International coal prices had also softened by ~ 26% QoQ to US$235/ton during Q3FY23. Subsequently, power and fuel expense per ton for our coverage universe declined 7% QoQ to Rs 1680/t (as companies still had high-cost inventory). UltraTech Cement registered highest EBITDA/t in our coverage universe, to the tune of Rs 869/t (up 12% QoQ). For Ambuja Cement, synergies with Adani Group helped significantly to contain costs (especially fuel and freight) which propelled profitability (EBITDA/t: Rs 813 vs. estimate: Rs 678/t). Shree Cement continued to be one of the lowest cement producers (CoP: Rs 4270/t) and registered EBITDA/t of Rs 796/t. On the negatives, JK Cement reported weak profitability (EBITD/t declining 18% QoQ to Rs 669/t) owing to lower white cement sales (down 9% QoQ). 

Our perspective: 

Underlying cement demand is expected to remain healthy in the medium term (8-9% growth) owing to a boost in government spending on infra projects and upcoming general elections in 2024. Fuel prices have further softened with international coal prices declining 31% to US$140/t (flattish YoY). Hence, overall, we expect cost reduction of Rs 200-250/ton over the next two quarters. Also, companies are expected to undertake price hike to the tune of Rs 10-15/ bag from mid-February onwards. Hence, we expect EBITDA/t to surpass Rs 1000 levels from Q4FY23 onwards. Over a longer term perspective, owing to certain inherent structural changes (such as no new pet coke capacities coming up globally and sustained increase in fly ash prices) CoP is expected to stay elevated compared to historical averages. Hence, we do not anticipate a material price correction from current levels.

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