Cement companies are experiencing an upward trajectory in their shares, with returns ranging from 8% to 20%, driven by factors such as acquisitions, capacity enhancements, and favorable structural and macro developments. The third quarter of the current financial year holds promising tailwinds for these companies.
1. Rising Cement Prices:
- The average all-India price for the third quarter has shown a 4% sequential increase, reaching Rs 386.59 per 50-kg bag.
- Southern region experienced the highest price surge at 6.8%, followed by the eastern and northern regions at 5.9% and 4.6%, respectively.
2. Declining Energy Costs:
- Prices of crucial fuels like crude oil, pet coke, coal, and diesel have decreased, positively impacting the raw-material costs for cement production.
- The drop in Brent crude prices by 14% since October has influenced diesel and pet coke prices.
- Diesel prices in India have remained steady since May 2022, and imported and domestic pet coke prices have witnessed decreases.
- The decline in energy costs contributes to a more favorable cost structure for cement companies.
3. Efficient Cost Management:
- Companies have successfully reduced logistics and power & fuel costs, leading to improved Ebitda margins.
- Key input costs, including logistics and power & fuel, saw year-on-year declines in the second quarter, with logistics cost falling by 3% and power & fuel cost dropping by 22%.
4. Growth in Volumes:
- Sales volumes reflect robust demand in infrastructure and construction, with companies like Ramco Cements Ltd., JK Cement Ltd., and ACC Ltd. experiencing significant yearly growth in sales volumes.
- Motilal Oswal Financial Services Ltd. estimates industry demand to grow by 6–7% in the third quarter.
5. Demand Trends:
- October witnessed double-digit growth in demand, while November saw a temporary decline due to the festive season.
- Demand is expected to improve in December, driven by strong demand from infrastructure projects, commercial capital expenditure, and recovery in demand from individual housing and rural segments.
6. Margin Expansion:
- The overall scenario presents an opportunity for strong margin expansion in cement companies.
- Major firms have witnessed healthy expansion in Ebitda margins over the past year, with a positive outlook for the current macro environment.
Despite varying demand trends and short-term fluctuations, the cement sector anticipates continued growth and profitability, evident in the sustained rise in share prices and favorable industry dynamics.