High input costs and moderate fuel prices
Cement companies have expressed concern about high input costs over the last year, particularly energy prices which have experienced a surge due to geopolitical conflicts, and a resulting increase in crude costs that has impacted freight costs. However, domestic and international prices for pet coke and coal have slightly moderated in recent months. It is hoped this will lead to a declining cost of production for cement companies and an increase of around Rs150-200/tonne in Ebitda/tonne.
India’s cement market
India is the second-largest producer of cement in the world and is responsible for over 8% of the global installed capacity, behind only China. However, despite this, cement consumption per capita in the country is only half of the world average and is particularly underpenetrated. There is scope for improvement in Indian government spending on infrastructure and housing, as well as in private real estate demand. Cement consumption is expected to keep pace with cement supply, and demand for cement over the next 2-3 years could witness a CAGR of 8%-9%, leading to improved utilisation rates.
Consolidation and expansion in the cement sector
Large players in the cement industry are expected to expand, particularly in the southern market and western region. But this also augurs well for mid-cap and small cap players in the form of better valuations, as large players aim to maintain or increase their market share through inorganic growth. The sector is expected to undergo healthy consolidation over the coming years with benefits for both acquirer and target companies.
Premiumisation in product mix and margin improvement
Over the medium term, greater demand for housing may lead to a premiumisation of product mix for cement players. If individual home-building picks up, trade sales will also improve significantly, improving the margin profile. With worst-margin performance likely to have come in fiscal year 2023, capacity additions and pricing strategies will be closely watched in the coming quarters. Risk-reward is seen as favourable.
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By Jyotivardhan Jaipuria
High input costs, particularly the spike in energy prices owing to geopolitical conflict, were a key concern for cement companies during the last 12 months. Escalation in crude costs also impacted freight costs.
Domestic and international pet coke and coal prices, though still high, have moderated in the last few months. Pet coke prices have seen moderation by 25%-30%. South African and Australian coal prices witnessed a sharp decline of 35% and 44% q-o-q, respectively, during Q4FY23.
Since some part of the high-cost fuel inventory would be consumed during Q4FY23, the positive impact of the low-cost inventory would be fully reflected in the companies’ operating performance only in Q1FY24. Bulk diesel prices remained stable during the quarter. This will lead to a sequential decline in the overall cost of production of cement companies during the quarter. Owing to lower operating costs, we expect Ebitda/ tonne of the companies to increase by Rs 150-200/tonne.
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India is the second-largest producer of cement in the world. It accounts for more than 8% of the global installed capacity, only behind China (54%). However the Indian market (per capita cement 240-250kg) is one of the most underpenetrated with per capita cement consumption being half of the world average (500-550kg) and even behind countries such as Brazil and Indonesia.
India’s cement demand over the next two-three years may witness an average 8%-9% CAGR, leading to improved utilisation rates. We expect cement consumption to keep pace with cement supply owing to better execution, higher government spending on infrastructure and housing, and well-supported private real estate demand. Pre-election spending is another important catalyst which will drive cement demand. With large part of the additions in the form of grinding units, clinker utilisations are likely to remain higher than cement utilisations, indicating a higher effective utilisation rate.
We believe the sector will undergo a healthy consolidation over the coming years. We expect large players with net cash balance sheet will follow inorganic growth to increase or maintain market share, which augurs well for mid-cap /small cap players, as they will get better valuations. Consolidation is a win-win for both the acquirer and the target companies on account of valuation disparity (mid-caps trade at 40% discount to large cap on EV/tonne). Recent acquisition of Jaypee assets by Dalmia and purchase of limestone mine by JSW from India Cements are pertinent cases. Given the high fragmentation and a large number of small-to-mid sized players, the southern market offers a high potential for inorganic expansion, followed by the western region.
India is the second-largest producer of cement in the world. It accounts for more than 8% of the global installed capacity, only behind China (54%). However the Indian market (per capita cement 240-250kg) is one of the most underpenetrated with per capita cement consumption being half of the world average (500-550kg) and even behind countries such as Brazil and Indonesia.
India’s cement demand over the next two-three years may witness an average 8%-9% CAGR, leading to improved utilisation rates. We expect cement consumption to keep pace with cement supply owing to better execution, higher government spending on infrastructure and housing, and well-supported private real estate demand. Pre-election spending is another important catalyst which will drive cement demand. With large part of the additions in the form of grinding units, clinker utilisations are likely to remain higher than cement utilisations, indicating a higher effective utilisation rate.
We believe the sector will undergo a healthy consolidation over the coming years. We expect large players with net cash balance sheet will follow inorganic growth to increase or maintain market share, which augurs well for mid-cap /small cap players, as they will get better valuations. Consolidation is a win-win for both the acquirer and the target companies on account of valuation disparity (mid-caps trade at 40% discount to large cap on EV/tonne). Recent acquisition of Jaypee assets by Dalmia and purchase of limestone mine by JSW from India Cements are pertinent cases. Given the high fragmentation and a large number of small-to-mid sized players, the southern market offers a high potential for inorganic expansion, followed by the western region.
India’s cement demand over the next two-three years may witness an average 8%-9% CAGR, leading to improved utilisation rates. We expect cement consumption to keep pace with cement supply owing to better execution, higher government spending on infrastructure and housing, and well-supported private real estate demand. Pre-election spending is another important catalyst which will drive cement demand. With large part of the additions in the form of grinding units, clinker utilisations are likely to remain higher than cement utilisations, indicating a higher effective utilisation rate.
We believe the sector will undergo a healthy consolidation over the coming years. We expect large players with net cash balance sheet will follow inorganic growth to increase or maintain market share, which augurs well for mid-cap /small cap players, as they will get better valuations. Consolidation is a win-win for both the acquirer and the target companies on account of valuation disparity (mid-caps trade at 40% discount to large cap on EV/tonne). Recent acquisition of Jaypee assets by Dalmia and purchase of limestone mine by JSW from India Cements are pertinent cases. Given the high fragmentation and a large number of small-to-mid sized players, the southern market offers a high potential for inorganic expansion, followed by the western region.
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Over the medium term, given the sustained housing demand, we expect further premiumisation in product mix for these cement players. Moreover, if individual home-building picks up, trade sales will also go up, significantly improving the margin profile.
Overall, capacity additions and pricing strategy would be keenly watched in the coming quarters. With worst in terms of margin performance likely behind with FY23 results, we see risk-reward as favourable.
The writer is founder & MD, Valentis Advisors