Earnings Preview: Cement companies likely to report subpar performance in Q1FY25 amid slow volume growth, soft demand

Domestic brokerage firm Systematix Institutional Equities anticipates cement companies within its coverage to deliver subpar performance in the first quarter, primarily due to weak prices and lower volumes impacting earnings.

Despite numerous efforts, cement companies have struggled to implement price hikes, resulting in an average drop in realisations of ₹111/tonne from the fourth quarter, and a significant decrease of over ₹200/tonne from its peak in October 2023.

Pan-India prices averaged ₹349 per bag, a 2-2.5% decrease compared to the fourth quarter. Demand experienced a slight increase in June 2024 following a sluggish April and May, it noted. 

Systematix projects volume growth for companies under its coverage to be in the range of 6-7% year-over-year, with notable performances from Sagar Cements, JK Cement, and Shree Cement at 23.0%, 9.1%, and 7.8%, respectively.

In contrast, it estimates Dalmia Bharat and UltraTech Cement to report slower growth at 5.5% and 6.0%, respectively. It forecasts volume, revenue, EBITDA, and PAT growth for the first quarter of FY25 to be 6.8%, 0.7%, 2.6%, and -6.6%, respectively.

Significant Rise in Raw Material Costs

The brokerage anticipates a slight improvement in operating expenses, primarily driven by power and fuel (P&F) costs. South African Richards Bay coal prices have decreased by over 30% year-on-year and have remained stable.

Consequently, power and fuel costs for the companies under their coverage are expected to improve by ₹20–50 per ton. However, freight and other costs may see a slight increase due to operating leverage, it said. 

The brokerage highlighted a substantial rise in raw material costs for cement players, with some moderation expected. Despite cost-saving measures, it expects EBITDA per ton to decline due to a sharp drop in realisations of ₹319 per ton year-on-year and ₹131 per ton quarter-on-quarter.

For 1QFY25, the brokerage expects the EBITDA per ton for its coverage universe to be ₹915 per ton. Shree Cement and UltraTech are projected to report EBITDA per ton of ₹1,222 and ₹1,014, respectively, owing to price discipline, strong brand reputation, and superior cost management.

Conversely, Ramco, Dalmia Bharat, and Sagar Cements are likely to underperform.

UltraTech to Hold a 22% Market Share

According to the brokerage, the cement industry is seeing major firms aggressively compete for market dominance, leading to sector-wide consolidation. The market share of the top five companies has increased from 45% in FY15 to 54% in FY24.

UltraTech recently acquired a 23% stake in India Cements, and Adani Cement announced its acquisition of Hyderabad-based Penna Cement for ₹10.4 billion. With the acquisition of Kesoram Industries and the potential acquisition of India Cements, UltraTech's market share in the Southern Region is expected to rise to 22% from the previous 11%.

To avoid overcapacity, larger companies are pursuing growth through a combination of organic and inorganic strategies.

Outlook: Government's Ambitious Growth Initiatives

The industry is projected to expand by 7-8% this fiscal year, with major players leading the charge in adding 220 MTPA of new capacity, accounting for a significant share. Consolidation trends, especially in southern regions, are expected as larger firms acquire financially strained smaller players.

According to insights from brokerage channels, any attempts at price increases until the third quarter of FY25 are likely to face challenges due to subdued demand and monsoon-related factors. 

However, a robust demand recovery is anticipated in the second half of the fiscal year, supported by planned price adjustments that are set to enhance both volumes and profitability.

Systematix maintains a positive outlook on the sector's long-term growth prospects, driven by strong underlying demand bolstered by economic initiatives and expansive government plans. Ultratech Cement, ACC, and Sagar Cements remain the brokerage's favored picks within its coverage universe.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.