Cement cos to face margin heat if price not increased by Rs 50/bag: HDFC Securities
Rajesh Ravi, Institutional Research Analyst – Cement, HDFC Securities, told CNBC-TV18 that cement companies need to hike prices by Rs 50 per bag in order to sustain their margins in the June quarter. However, he cautioned that while cement demand is strong, there’s a need to see if the proposed price hike can be absorbed by the consumers. He also mentioned that lower supply from the Holcim Group might be a positive for the Indian industry.
In an interview with CNBC-TV18, Rajesh Ravi, Institutional Research Analyst – Cement, HDFC Securities, said that price hikes are needed to maintain margin for the industry. He explained that cement companies need to hike prices by Rs 50 per bag in order to sustain their margins in the June quarter. However, he cautioned that while cement demand is strong, there’s a need to see if the proposed price hike can be absorbed by the consumers.
"Cement industry in the peak of Q4 could not take price hike partly because January demand was bad and late February onwards there had been price recovery. Given that most of the other commodities have already rallied significantly, cement prices haven’t shot up to that extent. And given that now the cost for the industry is staring to be at least Rs 600 high on a per tonne basis, there is nothing Rs 50 price hike which is needed just to sustain the Q4 numbers and if the industry has to go back to what it has delivered in Q1 and Q2 of FY22, another Rs 30 to 40 price hikes are needed. Now, will demand support that? I believe it has to be pushed through. So, I believe demand is there, the commentary so far is not disappointing, I will say, however, will companies be able to take another Rs 30 to 40 price hike? Obviously, there will be a lot of pull and push which will go through," he said.
Holcim Group, the world’s largest cement manufacturer, may exit India as part of a global strategy in a bid to focus on its core markets. The Switzerland-based conglomerate is currently considering a sale of its 63.19 percent stake in Ambuja, and 4.48 percent stake in ACC Ltd.
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Ravi believes lower supply from Holcim Group in Indian cement market will be a positive for the industry. He believes that Holcim’s potential exit strategy is aimed at lowering its exposure to the cement space from 60 percent to 35 percent. He also added that it is unlikely that a big premium will be seen for Holcim’s cement assets.
"As far as the Holcim, the stock of Holcim selling off Indian asset, they have published a note recently and what we find is that Holcim has set a target to reduce its cement portfolio from 60 percent in CY20 to almost 30-35 percent odd by CY25. And in this context, they have also sold of assets and few other geographies - Brazil, they have exited, North Ireland they have exited and even Eastern Africa and Madagascar markets they exited. India being a big size, exiting it on one go may accelerate their target to exit Indian market and how will this impact ACC-Ambuja’s performances, it is early days to comment, but broadly what I understand is these M&As can slowdown the renewed capex which ACC and Ambuja has been talking about so far. And that could be a good news for the industry. When two big players were talking about getting aggressive on the capex front, if they slowdown that would reduce the demand supply imbalance and support the industry," he explained.
Cement maker ACC Ltd recently posted its Q1 earnings. The company reported a 29.6 percent year-on-year (YoY) drop in consolidated net profit at Rs 396.3 crore for the first quarter ended March 31, 2022. The company, which follows a January-December financial year cycle, posted a net profit of Rs 563 crore in the same period a year ago.
Ravi believes ACC’s results were largely in line with the estimates. In fact, the company’s margin exceeded estimates owing to its continued focus on cost.
"ACC results are in-line with what we have been estimating for the industry trend in Q4FY22. Flattish volumes sequentially, flattish realisation, flattish volume year-on-year and there was a slight margin recovery as the overall cost could be contained to healthy cost control and because of fuel prices remaining stable in this quarter on an elevated way," he said.
Watch the video for the full interview.
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First Published: Apr 21, 2022 12:36 PM IST
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