Cement stocks under pressure; CRISIL expects cement prices to dip 1-3% in FY24

Most cement stocks were trading in negative terrain on Tuesday, in sync with the broader market. Shares of major cement companies Ambuja Cements, Ultratech Cement, Shree Cement, India Cement, Heidelberg Cement, Jk Lakshmi Cement, and Ramco Cements fell up to 2% intraday. In comparison, the BSE benchmark Sensex dropped as much as 0.6% during the session so far. Among the major players in the cement sector, only ACC was trading higher, rising up to 1% intraday.

According to a CRISIL report, cement prices are expected to fall 1-3% in the current fiscal, after clocking a 4% compound annual growth rate (CAGR) over the past four to a new all-time high of ₹391 per 50 kg bag last fiscal. This was attributed to cooling costs and intensifying competition.

“The run-up was due to disruptions caused by Covid-19, followed by a sharp surge in input costs, especially thermal coal, further aggravated by the Russia-Ukraine war. Now, heightening competitive intensity and softening input costs are set to reverse the trend,” CRISIL says in the report.

The report notes that prices have moderated since early 2023 on the back of a gradual softening of energy costs and efforts of manufacturers to gain market share in a seasonally strong fourth quarter. “Prices fell around 1% to ₹388 per bag on average in the fourth quarter of last fiscal sequentially, despite manufacturers carrying high-cost inventory. On a year-on-year basis, though, prices have remained elevated.”

The report further states that the heightened competitive intensity can be gauged from the fact that, for the first time in several years, there were no pre-monsoon price hikes in April and May this fiscal despite steady demand. The push to improve market share is evident from the top five players comprising 55% volume share last fiscal compared with 49% pre-Covid-19, it added.

CRISIL expects cement demand growth to be strong at 8-10% on-year this fiscal, the pre-election year. “This, however, will not propel prices up. On the contrary, prices are set to decline around 2% on-year to ₹382-₹385 per bag, pulled lower also by relatively moderate growth in the trade segment,” says Hetal Gandhi, Director – Research, CRISIL Market Intelligence and Analytics.

The scenario on the input front also favours lower prices. The international petcoke prices, a crude oil derivative and a key input in cement production, have eased beginning the second quarter of fiscal 2023, and declined 13% on-year in the second half of fiscal 2023 in tandem with crude oil prices. Domestic petcoke prices have followed suit, too. Also, domestic petcoke, international petcoke, and Australian coal prices fell a further 17%, 23% and 14%, respectively, in May compared with March 2023. Diesel prices are also projected to moderate as well in the latter half of the fiscal as oil marketing companies would have recouped prior losses from cooling crude oil prices.

The agency, however, cautioned that any rebound in fuel prices, which may affect petcoke and coal prices, would be a key monitorable.

Meanwhile, Axis Securities in a report said that cement volume grew by 10% in FY23, on the back of higher government spending on Infra, housing, and Residential, as well as robust demand for commercial real estate. Besides, recovery in rural demand also boosted volume growth.

The report highlights that the cement prices are largely stable, while some hike is expected in June, and if not, it may only increase post the monsoon season. Higher cost of fuel remained the key concern for cement companies in FY23 as they could not pass on cost inflation. However, with softening prices of pet coke and imported coal by over 40-60% in the last six months, the benefit of lower fuel prices will start flowing in from Q1FY24 as most of the companies were carrying high-cost inventory, it added.

Going forward, Axis Securities remains positive on cement stock, citing strong demand, which is projected to grow at a CAGR of 9% over FY23-FY25E. “Despite companies adding capacities, we believe that cement demand will outpace the cement supply,” it said.

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