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OpinionsDespite a mixed 1st quarter, cement sector’s FY24 outlook looks concrete

Despite a mixed 1st quarter, cement sector’s FY24 outlook looks concrete


By Devangshu Datta

Cement companies posted mixed figures for the first quarter of the 2023-24 financial year (Q1FY24).

Volume growth was robust at 17 per cent year-on-year (Y-o-Y) — on an aggregate basis — for 15 cement comp­anies, with revenue growth at 15 per cent.

Aggregate earnings before interest, taxes, depreciation, and amortisation (Ebitda) were up 8.8 per cent Y-o-Y and 1.2 per cent quarter-on-quarter (Q-o-Q).

However, there were some negative factors, as realisations were down and operating costs were higher, with Ebitda per tonne falling below expectations.

Realisations declined by 2.7 per cent Y-o-Y (down 0.3 per cent Q-o-Q), and operating costs dropped only 1 per cent Q-o-Q.

Ebitda per tonne was at Rs 890, compared to Rs 867 in Q4FY23 –a much higher Ebitda growth, though, was anticipated.

On the expenditure side, there were disappointments.

Costs were expected to decrease by Rs 100-Rs 150 per tonne due to reduced coal and petcoke prices, but the actual reductions were much lower at Rs 35 per tonne.

Management guidance suggests that further cost reduction is probable in Q2FY24 due to the complete liquidation of expensive inventories.

Fuel and petcoke costs should also remain low through Q3FY24.

Cement prices remained mostly stable, with the southern region reporting a decline while the northern region experiencing small increases.

While management remains optimistic about demand growth, they predict that pricing may stay stable or even become negative due to increased competition.

In addition to planned expansions by many companies, Ambuja Cements acquired a 56.74 per cent stake in Sanghi Industries for an enterprise value of Rs 5,000 crore.

This deal implies a valuation of Rs 100 per tonne for existing cement capacity of 6.1 million tonnes, with planned expansion to 15 million tonnes.

For FY23, the sector recorded 11.8 per cent volume growth and 5 per cent realisation growth.

However, a 13.3 per cent rise in operating costs led to Ebitda per tonne dipping to Rs 787 in FY23, compared to Rs 1,087 in FY22.

The demand outlook for FY24 is promising, with expectations of double-digit demand growth, driven by increased government spending.

Analysts anticipate 14 per cent growth in FY24 volumes.

However, aggressive capital expenditure across the industry implies that supply will also grow, potentially leading to price wars.

Conversely, most capacity expansion will only come online in FY25, and as it is being added mostly by the top six players, the overall pricing impact might be limited.

Ebitda per tonne could average out at Rs 970 in FY24 if cost reductions materialise as expected.

Analysts are observing the growth trends and the potential for Ebitda per tonne expansion and remain positive on the sector.

However, valuations across the board may be scaled back in light of the competitive situation and slower than expected cost reductions.

Companies with the ability to gain market share and further reduce costs — compared to competitors — are likely to be preferred.

In the cement industry, where the commodity play is pure, scale and cost control will both be critical, along with a pan- footprint.

UltraTech continues to be the sector leader, with expansion plans on target.

JK Cement has been highlighted by some analysts, as it is likely to see volume expansion and better Ebitda per tonne.

The Ambuja Cements acquisition of Sanghi also signals the new owner's ambitions.

The Northlines is an independent source on the Web for news, facts and figures relating to Jammu, Kashmir and Ladakh and its neighbourhood.

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