Hope for a Bull Run Amidst Bear Volatility? The Case of India’s Cement Sector
Sluggish demand and a jump in fuel prices weighed on India's cement producers during the December quarter. However, there is hope.
Profitability:
All five listed cement businesses reported lower operating income in October-December, both year over year and sequentially. Dalmia Bharat Ltd. had the steepest decrease, owing to a more severe reduction in demand in its two core areas, the east and south, than peers. Additionally, high inflation pressure squeezed the profit margins of businesses.
Cost Efficiency:
For all companies, costs increased year over year and during the prior three months. While ACC Ltd. had the highest cost per tonne, Shree Cement Ltd. had the quickest rate of increase.
Inflationary pressures are projected to manifest themselves even in the current quarter, since high-cost inventory often declines with a lag as expected in the case of Dalmia Bharat. UltraTech Cement Ltd’s view remains that now that fuel prices have dipped from their high, no further shocks are anticipated. However, cost pressures remain significant at the present level, and unless crude behaves, the sector will be in a pickle.
Demand:
Demand for cement also decreased in the three months to December. It fell the most in the eastern area, owing to sand shortages, unseasonal rainfall, and labour shortages. Volumes increased year over year but decreased sequentially. Demand, on the other hand, is likely to increase during the typically strong March quarter and as a result of pent-up demand. This, together with price increases, is projected to mitigate some of the cost pressures in the quarter ended March 31.
Future Outlook:
In its third-quarter results call, UltraTech Cement said that demand was increasing throughout the country. This has boosted prices in a few sectors, and there are prospects of more rate increases as demand remains robust.
The corporations' profit margins are contingent upon their capacity to increase prices. All parties have shown collective agreement on the necessity for the industry to boost prices in the next quarter or so to ensure the survival of new capabilities while energy shortages continue to be a worry. The widespread view is that a Rs 50 increase per bag will help cover the gap created by increasing prices.
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