Cost pressure at its peak; margins to bottom out in Q2 - Cement Q2FY23 Preview
In the backdrop of utilisation of high cost fuel inventory, cement companies are likely to witness full pressure in terms of costs coupled with weak pricing on account of monsoons.
Cement prices witnessed a marginal improvement in September 2022 in most regions. However, average cement prices for Q2FY23 are expected to decline 4.1% QoQ (or down by Rs 17 to Rs 383/bag) due to an unfavourable pricing movement in July and August 2022. Domestic & international (US & Saudi Arabia) petcoke prices have fallen by ~30% and 40%, respectively, from their peak in May-June 2022. Also, cement companies have started sourcing cheaper petcoke from Russia and Venezuela against expensive South African/Australian coal/petcoke. Diesel prices are also currently 6% lower than the average price in Q1FY23.
Despite the recent cool-off in prices of key input raw materials, we expect cement sector operating margins to get squeezed further in Q2FY23 given the presence of high cost fuel inventory in the system. Further, a moderate pricing environment due to monsoons is expected to lead to 530 bps QoQ fall in margins to 12.2% (i.e. at multi quarter low levels). On the positive side, sales volume for our coverage universe is expected to grow 11.2% YoY. Region wise, performance of north and west based companies is expected to remain relatively better in terms of pricing while the east and south regions are expected to report better sales volumes YoY. While profitability for Q2 is likely to remain at a multi-quarter low, going forward, we expect margins to recover from Q3 onwards on softening international fuel prices, pick-up in construction activities (post monsoon) and a better pricing environment. The key thing to watch would be comments on the demand recovery post festive season along with ramp-up of infrastructure projects in the run-up to the general elections in 2024.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.