Markets
This indicator shows why cement companies have a rough road ahead
Summary
- The gap between trade and non-trade prices increased to more than ₹50 a bag in August from the normal ₹30-40 a bag, according to a Bank of Baroda Capital Markets Ltd report, indicating weak demand from the infrastructure segment.
The chase for market share gains among cement makers continues to hamper prices. The repercussions of heightened competition are being felt on cement prices in both the trade and non-trade channels. In the trade segment, manufacturers sell cement to dealers who in turn sell it to consumers. A non-trade sale is when a manufacturer sells cement directly to the end consumer. These are bulk sales to large buyers such as the government, or big infrastructure and real estate companies.
Given the relatively higher quantity, average cement prices in the non-trade segment are usually lower than those in the trade segment. However, the disparity between the two has increased of late. A Bank of Baroda Capital Markets Ltd report dated 30 August said the gap between trade and non-trade prices widened past ₹50 a bag in August from the normal ₹30-40 a bag. In fact, it was around ₹80 a bag in some parts of India, indicating weak demand from the infrastructure segment, the report added. The individual home building segment is the biggest driver of cement demand in India, estimated to contribute over 50%, followed by the infrastructure segment.
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Due to relatively better margins and consistency in demand, large companies generally prefer to focus on trade sales. In a non-trade sale, companies tend to save on several costs such as packaging and freight, which gives them room to offer discounts and consequently boost volumes. Clearly, in the current scenario, where volumes are being prioritised over realisations, the non-trade segment is in focus.
Industry-wide shift
According to a Nirmal Bang Institutional Equities report dated 31 August, there has been a 3-4% industry-wide shift from trade to non-trade segment. This change is more pronounced for companies that are rapidly expanding or commissioning capacities. After all, gaining market share via the trade sales typically takes longer. “This shift has led to a decrease in overall weighted average realisations for the cement industry," the report added.
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The realisations of Shree Cement Ltd took a beating in Q1FY25, falling more than analysts expected. One of the reasons for this was an increased proportion of non-trade sales during the quarter. Another example was Birla Corporation Ltd, which saw a marginal decline in trade sales. In its Q1FY25 earnings call, the company’s management said the industry is focusing on non-trade and institutional sales to tackle lower capacity.
As things stand, the subdued trend in trade prices over the past few quarters has affected the sector’s FY25 realisations outlook. The latest dealer channel checks by some brokers suggests that companies may hike prices in the trade segment in September. But after some recent failed attempts, it remains to be seen whether these potential price hikes are absorbed by the market.
Festive season brings challenges
The upcoming festive season from September to November is likely to make the demand scenario more challenging as it usually leads to labour shortages and a slowdown in construction. On the bright side, it’s widely expected that non-trade cement demand will rise going forward as budgetary allocations have been announced for various government infrastructure and housing projects. Even if prices are hiked in the non-trade segment, and they sustain, it’s unlikely to bring huge respite on earnings growth.
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Unless there is a sharp price hike backed by a sustained improvement in cement demand, raising prices by ₹15-20 a bag price doesn’t make sense, said a Yes Securities Ltd report dated 31 August. “We don’t see any big jump in Ebitda/tonne level for FY25E/ FY26E for the industry if this despair continues," it added.
Meanwhile, the performance of large cement stocks has been mixed. So far in 2024, shares of UltraTech, ACC Ltd and Ambuja Cements Ltd have risen by 8-18%. Shree Cement is a laggard, having fallen 8%. The volume-realisation tussle makes the sector’s valuation unattractive amid looming risks of further earnings downgrades.
