Cement sector booms on India growth story

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Whenever you see construction happening around you. You feel happy that the country is growing.  The cement sector is an integral part of India’s growth story. In current times a lot is happening in the sector. So let’s take a look.

Demand for cement is expected to remain strong. There are various tailwinds like a capex boom, higher government spending on infra and PLIs being given for the promotion of the manufacturing sector. Also, the outlook for the real estate and hospitality sector is good. So, companies in these sectors are expanding and penetrating tier 2 cities. This is happening at a time when prices of cement have shot up.

As per 99 acres, the price of a 50 kg cement bag was around Rs 200 before the outbreak of covid. Now they are hovering between Rs 300-400. Since demand is expected to remain strong there is not much incentive for cement companies to reduce prices. Couple the robust demand with high prices and you can expect strong top-line numbers for cement companies.

Let’s move to the cost. Fuel and coal are two very important raw materials for cement production. Their prices shot up after the Russia-Ukraine invasion and other factors. This was the major reason for the price rise in cement. Now prices of these raw materials have started cooling down.

As per Antique Stock Broking, imported fuel prices in May have fallen 10% (MoM). Its analysts estimated that a 10% fall in fuel price and a 2% hike in cement price increase EBITDA by an equivalent amount.

Then comes the coal. Coal prices have also increased in the past and 99 acres reported that for 100 tons of cement production, 25 tons of coal is required. Now, there is an improvement. International pet-coke prices are reported to decline 50% from their peak. On the domestic front, coke prices are down 35% from the peak. Just from March prices are down by 20%.

Improvement in cost and sustained high prices may improve margins while providing a significant boost to the bottom line.

Let’s talk about companies in these sectors. It seems that Ultratech is a favoured bet of brokerages. Many have given a buy rating on the stock. The reasons are gain in market share, increased capacity and a fall in debt levels.

However, there are few risks also in the sector. In case of any bottleneck or issues, raw material prices may shoot up.

There are expectations of good demand but the economy is estimated to grow at a slower rate.

At the same time with Adani in the industry, competition may ramp up. This might put downward pressure on cement prices and upward stress on raw material costs leading to a squeeze in margins.