Stock Fundamentals

Stellar Q2 by cement companies despite cracks

Keerthi Sanagasetti | Updated on November 03, 2019

Sales volumes fell significantly due to floods in many states. Cost controls saved the day

Cement manufacturers saw healthy growth in volumes for the last eight quarters (till June 2019), led by a surge in construction-led demand. This rally continued despite an expected slowdown during the election months (March-May 2019). Since the demand outlook was driven by the Centre’s push for infrastructure and construction spend, cement prices also saw healthy traction during these quarters.

But the latest September quarter has been a dampener of sorts with a higher-than-expected drop in volumes. Cement prices too were impacted, witnessing a sequential fall — though up from last year. We deep dive into the Q2 results of leading cement manufacturers to assess their performance and outlook for the rest of the fiscal.

Floods impacted volumes

In the previous June quarter, both volumes and prices grew strongly. This, along with cost savings on account of a decline in the prices of imported fuel (pet coke) and the drop in logistics costs, led to substantial earnings growth. Companies such Ultratech and Heidelberg reported their highest-ever (quarterly) EBITDA/tonnne in the last decade.

With the onset of monsoon, the September quarter is considered a seasonally weak quarter for cement manufacturers. Add to this, the peak volumes of June quarter were expected to plateau. Hence, both volumes and realisations were projected to dip by a notch in 2QFY20.




But companies witnessed a higher-than-expected drop in volumes in 2QFY20. This is because most parts of the country were flooded during the quarter. What made matters worse was the elections and policy paralysis in several states, including Andhra Pradesh. The resultant slowdown in awarding construction contracts had a huge impact on cement demand and led to a dismal volume growth.

Cement major Ultratech that accounts for 21 per cent of the country’s cement capacity reported 1 per cent drop in its domestic volumes in 2QFY20. Ambuja Cements and ACC posted 4 and 2 per cent dip in sale volumes, respectively, in the September quarter.

The only company that saw growth in volumes was Shree Cement — up by 1.5 per cent y-o-y. However, the growth came in entirely from its new plant in South India.

Cement prices — being a function of demand and capacity utilisations — were also impacted in the quarter. However, the blended realisations were still higher, compared to the year-ago period. Hence, most companies reported a 5-9 per cent y-o-y growth in realisations.

Standing out in the crowd, with an 8 per cent surge in the sale of premium products, is ACC, which reported a stellar 25 per cent spike in its blended realisations. The company’s realisation per tonne was ₹5,965 in the September quarter.

Healthy realisations, coupled with continued cost savings, spurred the earnings growth for cement manufacturers in the September quarter. Companies reported growth in their EBITDA per tonne in the 28-36 per cent range y-o-y.

Cost savings

Cement companies continued to witness savings on the energy costs front, led by installation of waste heat recovery plants (WHRS). With imported pet coke prices falling by about 4-7 per cent y-o-y, the savings have been substantial for cement manufacturers.

For instance, Ultratech reported a 12.3 per cent y-o-y drop in its power cost per tonne in the September quarter. Another important element is the logistics cost. This essentially forms 20-30 per cent of the cost for a cement manufacturer. Thanks to the strategic consolidation in the industry, cement companies have significantly brought down their lead distances. This coupled with falling diesel prices have resulted in steep decline in their freight cost.

The Railways’ move to waive the peak season surcharge came as an added advantage. As a result, in the September quarter, most companies reported a 5-6 per cent drop in their freight cost per tonne.

Fly ash prices

In a move to keep volumes steady during turbulent times, cement companies continued with the sale of premium products. With the mix skewed towards these products, the usage of fly ash also skyrocketed. During the September quarter, fly ash prices spiked 3 per cent sequentially, impacting profits for cement manufacturers.

Positive outlook

Riding on the Centre’s continued focus on infrastructural spend, the outlook for cement demand remains positive. After the slackness witnessed in 2QFY20, cement demand is expected to pick up in the quarters ahead. The healthy monsoon witnessed thus far could help drive rural demand as well.

While the volume growth is expected to be healthy, realisations are also likely to remain stable.

On the cost front, benefits of the waived peak season surcharge and further drop in pet coke prices will continue to aid profitability in the coming quarters as well.

For instance, the purchase price of imported pet coke is currently at $70-71. But the consumption rate reported by cement companies in the September quarter was as high as $90-94. This indicates a possible drop of 23 per cent in energy costs in the coming quarters.

Published on November 03, 2019

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