Soft Performance Expected on Cost Pressure & Dismal Realisation

Transient impact of GST roll-out, prolonged monsoon, sand crisis in several pockets and dismal realisation will affect the cement companies in 2QFY18. The companies under our coverage universe (comprising of 11 stocks) are likely to witness yet another soft performance in  the recently concluded quarter as expected. A decline in average earnings to the tune of 9 per cent YoY and 38 per cent QoQ is likely for the companies under our coverage universe. However, average EBITDA is expected to remain broadly flat on YoY comparison. Notably, higher volume for selected companies due to new capacity and geographical diversification led to an average volume growth of ~12 per cent YoY for the companies under our coverage universe.

On operational front, cost is likely to remain flat sequentially, but higher on YoY basis due to spike in fuel and freight cost. The channel check suggests that industry has seen deterioration to the tune of ~4.5 per cent QoQ on all-India average price basis due to subdued demand and passing on of GST benefits to the tune of 2-3 per cent to the retail segment. Hence, we expect 2-3 per cent fall in average realisation will be revenue neutral and balance 1-2 per cent decline will impact margins. We expect UltraTech, Shree Cement and Ramco Cements to report higher EBITDA/tonne in the range of Rs900- 1,050. We foresee 2HFY18 would be strong for cement companies mainly owing to: (a) low base of volume growth; (b) likely recovery in realisation; (c) continuous traction in infrastructure projects; and (d) potential pick-up in rural consumption led by favourable monsoon.

Demand Remains Sluggish

Cement demand continued to remain sluggish during the quarter mainly owing to transient impact of GST roll-out, prolonged monsoon, sand crisis in several key pockets and subdued real estate activities mainly led by RERA implementation. However, the companies under our coverage universe are expected to record an average yearly growth of 12 per cent (down ~8 per cent QoQ) owing to capacity addition and geographical diversification. The companies having exposure to Eastern and Northern regions are expected to report better volume growth due to relatively better demand environment. Among pan-India players, ACC (owing to new capacity addition) and UltraTech (owing to acquisition of Jaypee’s capacity) are expected to witness double digit growth in volume.

Subdued Realisation to Impact Margins

Having witnessed a healthy realisation in 1QFY18, average realisation for 2QFY18 deteriorated to the extent of 4.5 per cent QoQ on all-India level mainly due to soft demand environment and passing on of GST benefits. Notably, the cement companies had to pass on the benefit of GST to the tune of 2-3 per cent to the retail segment, which will be revenue neutral for them. However, actual impact of realisation dip will be in the range of 1-3 per cent QoQ. The companies having exposure to Western and Eastern regions to do better, as average realisation in these regions have relatively been better than the rest.

Cost Pressure to Remain Elevated

Spiralling fuel prices and freight cost have been major drag for the cement companies for last few quarters. Given the visible economic pick-up in the developed countries, we expect the fuel prices are unlikely to soften meaningfully in the medium term. Further, production disruption of petcoke in the USA owing to cyclone impacted the petcoke prices, though the impact will not be visible in current quarter. Since the companies used high cost inventories in 1QFY18, we do not expect any sequential spike in fuel cost. Further, compliance to strict loading and unloading guidelines by the states may lead to higher logistic cost for the cement companies. We factor in an average 3 per cent YoY increase in operational cost/tonne for the cement companies under our coverage.

The Writer is Research analyst Reliance securities