Q2FY24 earnings review: Cement companies report strong Q2 numbers, aided by lower rainfall and price hikes

Cement companies reported a strong set of numbers for the September quarter, owning to lower-than-expected rainfall and price hikes. While volume growth continued to be robust, realizations impressed in a seasonally weak quarter.

The September quarter is typically a dull period for the cement sector due to the monsoon, however, lower rainfall has helped the cement companies to post strong numbers for the quarter. Additionally, a decrease in power and fuel costs, constituting about 30% of expenses for cement manufacturers, contributed to maintaining profitability during this seasonally challenging period.

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Investors responded positively to the robust performance of these companies. For instance, JK Cement shares have surged by 10.38% since the announcement of its Q2 results on November 4, and Ultratech Cement shares have seen a decent uptick of nearly 6%.

Strong volumes 

Domestic brokerage firm Nuvama Institutional Equities pointed out that 11 major companies have reported 14% YoY volume growth in Q2FY23 (down 10% QoQ), with Ramco, JK Cement, and ACC reporting the strongest volume increase (>17%) during the quarter.

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Lower power and fuel costs per tonne (mainly driven by Ramco, Dalmia, and ACC) and freight costs per tonne (driven by Dalmia, Nuvoco, and JK Cement) helped keep profitability afloat in a seasonally weak quarter, said Nuvama. 

While EBITDA per tonne experienced a marginal 2% QoQ decline, it soared impressively by 57% YoY due to a lower base. Looking ahead, the brokerage anticipates a further decline in fuel costs in Q3FY24. 

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However, the recent upswing in fuel prices, with imported pet coke and coal experiencing a 31% and 37% increase from their lows, has raised concerns about potential cost escalations in Q4FY24, it noted.

Better pricing

Despite facing a seasonally weak quarter, the brokerage stated that the realizations were improved both quarter-on-quarter (QoQ) and year-on-year (YoY). There was a price surge of ₹70 per bag in the East region in September 2023, and according to Nuvama channel checks, the market effectively absorbed the majority of this increase.

This was followed by price hikes in the North, Central, and West markets. Lastly, in October, South India too witnessed price hikes, it added.

Near-term outlook positive

Nuvama believes FY24 will see robust volume growth (in double digits), led by a pickup in real estate demand and the government’s thrust on infrastructure spending. With pricing improving, the brokerage anticipates margins will further improve QoQ in Q3 FY24, aided by softness in coal and pet coke prices (benefits of lower cost structure will continue till Q3FY24). 

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However, from Q4FY24, the raw material cost base will start becoming unfavorable; hence, the pricing trend needs to be monitored, as its sustainability would be key to maintaining profitability, it stated.

The brokerage recommends a 'buy' rating on JK Cement, ACC and upgraded Ambuja Cements to 'Hold' rating. It continues to maintain a 'Hold' rating on UltraTech Cement and Grasim Industries. However, it retains a 'Reduce' call on India Cements (citing low profitability) and Shree Cement (attributed to rich valuations).

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.