Trade pundits had predicted a slow season for cement in the second quarter of 2022, primarily due to a decrease in construction activities. While cement companies were forewarned, what they did not expect was a severe cost inflation to make a grand entrance. This has negatively affected the profit margins for the September quarter. Increased input costs and straggling prices caused the tectonic plates of market dynamics to clash, resulting in a disheartening quarterly performance.
But the industry is not one to let setbacks derail its momentum. Most cement companies reported multi-year low margins, in terms of earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne. However, once the monsoon season was behind us, and construction restarted in earnest, they were quick to recover. The following quarter is witnessing a rise in cement prices across the country, excepting parts of central India. Although the market response has not been as enthusiastic as it was in the previous year’s festive period, certain corrections are definitely being made. One of the important factors of these economic corrections is softening of input prices such as coal and pet coke. This combined with increase in cement prices can translate into a positive outlook for the cement sector in the current quarter. However, there is the big bull’ called ‘demand’ still to contend with! Softening of input costs and rising cement prices aren’t enough to bring the margins out of the red. The third ball that cement companies have to juggle with is the demand for cement.
To understand the demand quotient, we need to look at the socio-political scenario of our country. With the next general elections looming in 2024, the central government is likely to expedite several turnkey projects like the ones under the Pradhan Mantri Awas Yojana (PMAY)-Gramin. With the government likely to allocate an additional Rs.28,000 crore for the flagship rural housing programme, the social-political ball in this juggling act is likely to be the top most. Moreover, as the Russia-Ukraine war continues, there is the energy price volatility to contend with. And with that we have another ball to juggle!
Cement stocks’ performance largely depends on the growth of the economy as they are cyclical in nature. Cement companies are investing heavily in capex, thereby boosting the investor’s confidence.
With our expert eyes focussed on the economic trends of the cement industry, we are optimistically watching cement companies perform a juggling act by keeping the balls of input costs, demand, prices and socio-political influences, firmly in the air.