Centrum downgrades cement stocks on growth slow-down

India’s cement demand is expected to grow at a slower pace of 6-8% in FY24, down from the estimated growth of 12-13% in FY23, said Centrum Broking, as it downgraded stocks of Heidelberg Cement, Sagar Cements, JK Lakshmi Cement and Ultratech Cements. Of these, the last two stocks are still at ‘Add’ ratings.

The moderation in growth is being attributed to the fading of pent-up demand post-COVID and the high base effect of the previous year. This year, cement volume growth will be primarily driven by government infrastructure projects and affordable housing schemes, including roads, metros, airports and other infrastructure development.

“Demand momentum post COVID has been relatively strong in the country with consecutive 3 years of good growth starting from FY22,” the broking house said in its report.

“However, we believe that this demand momentum is likely to halt given the expected slowdown in construction activities in 4QFY24 before elections due to code of conduct and deficient rains is likely to impact rural demand negatively.”

It pointed out that rainfall from the south-west monsoon has been 10% below its long period average till 1st week of September.

“While there is still some more time to make up for the deficiency in this month, El Nino effect is likely to keep rainfall below average impacting rabi crops sowing,” it noted.

It also expects some portions of the governments capex to be diverted to relief package or welfare schemes for farmers in case of continuation of deficient rains this year.

Moreover, overall growth rates are projected to moderate in FY24 due to the high base of FY23, when cement demand witnessed strong recovery following the COVID pandemic. Cement volume expanded 12-13% in FY23 after declining in FY21 due to the pandemic’s impact.

With two consecutive years of double-digit volume growth, incremental demand in FY24 will be comparatively lower, it added.

Pricing Outlook

Cement prices rose Rs 150-200 per bag across regions in FY23, owing to improved demand and escalating input costs. Prices are expected to remain largely stable at current levels in FY24 as demand growth moderates while input costs ease.

Key inputs like coal and petcoke influence cement manufacturing costs significantly. With declining international coal prices in recent months, domestic coal and petcoke rates are also anticipated to soften going ahead. This will cushion the impact of rising costs to some extent and support margins.

Various analysts expect cement EBITDA/tonne to increase by Rs 200-250 in FY24, aided by lower input costs. This would counterbalance the effect of slower volume growth on earnings to an extent.

Most cement stocks are trading close to target prices, adequately factoring in near-term growth potential. Select players like UltraTech Cement, Birla Corporation and Nuvoco Vistas are better placed currently based on their growth prospects and valuations.

FY24 Performance So Far

The Indian cement industry has registered healthy volume growth in the first half of FY23, although the pace of growth has decelerated compared to FY22. Cement production rose 12.8% year-on-year during April-August 2022, versus 71% growth in the same period last year.

Initially, rural housing and infrastructure drove demand growth before moderating due to monsoons. The affordable housing segment saw robust demand aided by government initiatives including the PMAY scheme.

Cement prices which had declined during the second COVID wave in mid-2021 recovered strongly from September 2021 onwards, with firms undertaking consecutive monthly hikes of Rs 15-20 per bag till March 2022 to pass on rising input costs. Prices continued to remain firm in the first half of FY23 too.

Cost pressure was witnessed in key inputs like coal, petcoke, diesel and packaging materials. Through price hikes and cost control measures, cement companies managed to maintain margins in FY22. However, the Russia-Ukraine conflict exacerbated input cost inflation in FY23.

Coal prices nearly doubled over the last one year owing to factors like Indonesia’s coal export ban, low coal inventory in India and high global energy prices. Diesel prices also remained elevated. To reduce impact, companies implemented waste heat recovery systems, increased renewable energy use and used alternative fuels.

Capex announcements by cement companies stood at Rs 28,000 crore in FY22 and Rs 25,000 crore in just first half of FY23, towards expanding capacity and adding grinding units closer to demand centers. With strong demand recovery over two years, capacity utilization levels rose to 70% in FY22.