Share price of major companies are up 10-18% in the last one month, but analysts target prices suggest more upsides ahead
The cement industry has faced a combination of cost escalation and weak demand in the recent past. This has led to margin pressures with EBITDA per tonne dropping sharply in Q3, 2021-22 versus Q2, 2021-22. However, the industry could now be on the recovery path with analysts saying capacity utilisation is strong and the demand cycle is likely to improve given the policy thrust on infrastructure and hopes of an uptick on housing.
The cost inflation remains a serious worry however since fuel/energy costs are very high, and that is a critical input in cement manufacturing. Sand prices are also higher. Cement prices in the South and West have seen hikes in the recent past and it’s likely that the North and East would follow through with hikes.
The Q4, 2021-22 is likely to see a drop in offtake compared to year-on-year (YoY) since the corresponding quarter was very strong. Sequentially there may be some volume improvement and operating costs are likely to remain around the same as Q3, 2021-22 though there could be higher costs feeding through and being felt in Q1, 2022-23 as well with lagged effect due to inventory of 2-3 months being held by many cement companies.
On a sequential basis, price hike in Q4 could have led to some improvement in realisations though profitability will be lower YoY. On a sequential basis, UltraTech, Shree Cement and Birla Corp are likely to register the highest gains in sales volumes in Q4 and most companies will have registered small sequential gains of 1-3 per cent per tonne in terms of realisations. Q1 (April-June) is usually a peak construction period so the industry is optimistic – sales volumes also grew in the last fortnight of March across the board.
Cost pressures are likely to persist in the medium-term due to the geopolitics of the Ukraine War and analysts assume that price increases of roughly Rs 35 per 50-kg bag would be required to net off the higher raw material and power costs. That’s roughly 4 per cent. However freight costs are also up and that’s another critical input. Price increases may need to be in the range of 15 per cent, or even higher to maintain EBITDA margins for most companies.
Technically speaking, there’s been strong speculative bull action across the sector in the last month. ACC is up 9.8 per cent, Ambuja Cements is up 13.9 per cent, Ramco Cements is up 15.5 per cent, Shree Cement is up 12.55 per cent and UltraTech is up by around 18 per cent. In every company, the returns in the last month, exceed the total returns of the last year indicating recent turnaround in sentiment.
This is normal in commodity sectors such as cement. While a given company may be more or less efficient, and have better distribution, or brand recognition, etc., the share prices of every company in the sector tend to trend in the same direction. Investors tend to take a shotgun approach. When they think a cycle is trending up, they buy across the sector and vice-versa, they sell every company when they think a cycle is trending down. Target prices released by industry analysts suggest there is still considerable upside at the current market prices.