Cement Sector reported decline in margins in Q1FY23 due to inflationary pressure

The Cement sector in India was anticipated to see a glut of supply going forward, which would impact utilisation levels for the cement companies, as leading cement players have been actively increasing their capabilities with changing dynamics of this Industry. Already the competitiveness has been spiked with the entry of Adani through acquisition of majority stake in ACC & Ambuja Cement which collectively have manufacturing capacity of 70 MTPA, second largest in India. Along with that, inflation in energy prices have been putting margin pressures over companies in this sector in Q1FY23.

Crude oil prices have fallen since their peak, but they still remain elevated. Additionally, there was a great deal of uncertainty about where oil prices will be for the second half of the year due to the wide range in projections from international investment banks. Prices for coal and pet coke have also remained high, but they have declined from their peaks. As a result, firms in cement sector suffered from margin pressures in Q1.

On the stock market as well, companies such as UltraTech Cement, Shree Cements gave negative YTD returns while Ambuja cements and ACC gave positive returns. These stocks have seen significant corrections in the beginning of 2022, while post Q1FY23 results they have resumed their upward rally. Let’s now try to understand the performance of Cement sector in Q1FY23 through top 4 picks in this sector including ACC, Ambuja cements, Shree Cements, UltraTech Cement.

Cement Sector firms: Revenue grew YoY while EBITDA and PAT saw YoY decline in Q1FY23

Cement prices are soft from the last 3 months due to monsoon & demand. On the costs, energy prices continue to remain volatile. Imported coal did fall below USD300/t at the start of Aug-22 but has again spurted and currently stands elevated at USD342/t (6000kcal). And depreciating rupee has also added up to overall cost of coal imports. Further, it is expected that energy prices will peak out from Q2FY23, else companies will be required to transfer to consumers through price hikes.

UltraTech Cement, largest cement manufacturer in India with domestic grey cement capacity of 114.6 MTPA, reported a 28% YoY increase in revenue in Q1FY23 to Rs 15,164 crores, led by higher sales volumes and better cost management. They also succeeded to beat street’s estimate by reporting consolidated EBITDA at Rs 3095 crores in Q1FY23. Their Operating margin stood at 20.4%. While Adjusted PAT stood at Rs 1582 crores. Further, the recently announced capacity expansion plan of 22.6 MTPA has been a part of its earlier growth plan of 50 MT. It aims to achieve 200 MTPA capacity by FY29-30.

Ambuja Cement Ltd, which follows calendar year, reported encouraging volume and revenue growth of 15% and 18% YoY respectively but witnessed EBITDA decline by 29% YoY in Q2CY22. This was mainly on account of higher costs during the quarter led by increased power/fuel costs, up 45% on a tonne basis YoY. Ambuja Cement Ltd also recorded EBITDA Margins of 17.1% against 28.5% YoY on account of higher costs. The company’s expansion projects are on track. It is adding cement grinding capacity of 1.5mtpa at Ropar (Punjab), brownfield clinker capacity of 3.2mtpa at Bhatapara and a cement grinding unit of 7mtpa at existing Sankrail and Farakka. The waste heat recovery system (WHRS) projects underway are expected to be commissioned in Q3CY22. With this the company’s total WHRS capacity would reach 87MW.

ACC cements Q2CY22 revenue rose to Rs 4,468 crores from 3,885 crores in Q2CY21, up 15% YoY owing to increased cement sales volume, up 10.5% YoY. While EBITDA margin saw a sharp slide from 22.4% in Q2CY21 to 9.5% in Q2CY22 due to increase in power and fuel costs which increased by 58% YoY and raw material costs up 36.9% YoY. As a result, PAT declined 60.1% YoY to Rs 227 crores.

Shree Cements, which is the third largest cement group in India with domestic cement capacity of 46.4MT as of FY22, has reported margins close to 20% despite cost pressures. Their operational performance for Q1FY23 were better than estimates. However, PAT were lower due to loss from some investments. Their Revenue grew 21.8% YoY to Rs 4415 crores led by higher realisations. Margins declined 990 Bps YoY to 19.5%. Lastly, they reported a PAT of Rs 279 crores as company accounted for fair value loss of Rs 96 crore on

investments that led to negative other income. With commissioning of 3MT grinding unit in Maharashtra, domestic capacity has reached to 46.4MT in FY22. The clinker unit in Chhattisgarh (capacity of 12000t/day) has also got commissioned (capex Rs 1000 crore). The entire total capex of Rs 4750 crore till FY24E will be funded via internal accruals. Total domestic capacity to reach 53MT post these expansions.

Our View:

It can be concluded that companies saw volume growth in Q1FY23, leading to growth in top line, while due to inflationary trends, margins remained in pressure. While it is expected that energy prices will peak out in Q2FY23, but it situation remains same companies will require to pass on price hike to consumers.

Despite the increase in interest rates, the government’s focus on infrastructure spending, increased urban real estate construction, healthy rural demand (due to forecast of a good monsoon), are all important factors that are expected to contribute to healthy demand for cement in the future. Here, the demand is expected to grow at 8% CAGR over the next five years.

Even, capacity expansion plans of cement players, along with scope for an improvement in utilization of existing capacities, offer strong growth visibility. Therefore, we can expect the cement sector to improve its performance in the next few quarters.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.