Operating leverage drives earnings growth for cement firms in Q3

Cement manufacturers saw a strong rebound in earnings in the December quarter after a forgettable September quarter, when the industry was reeling under the impact of a steep rise in raw material costs.

According to data compiled by Mint for 31 companies, net profit in Q3 rose 3.7 times from the September quarter. However, raw material and energy prices in the December quarter remained volatile, but overall cost pressure eased compared to the previous quarter. The revenues of cement companies were significantly boosted by double-digit volume growth, but cement prices grew in single digits. Ambuja Cements, UltraTech Cement, Dalmia Bharat and Shree Cements posted volume growth of 8-22% from a year ago.

Graphic: Mint

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Graphic: Mint

The all-India average cement price for a 50-kg bag at about 359 was up 3% sequentially in 3QFY23, and rose 6% from a year ago led by a 4-8% price rise in western, southern and eastern India, according to analysts.

Revenue grew at 14.63% from a year ago and 9.92% sequentially while profit before interest tax depreciation and amortization rose 48.77% sequentially, but was 7.02% lower year-on-year. Analysts said the strong pickup in volumes helped drive performance and operating leverage.

HDFC Securities analyst Rajesh Ravi said a 10% sequential volume growth drove the operating leverage for cement manufacturers during the quarter. Per-tonne profitability improved by about 200 a tonne sequentially to 800 a tonne with operating leverage contributing about 100 per tonne. Dalmia Bharat, UltraTech and Shree Cements reported per tonne Ebitda of 812-1,022 a tonne. ACC also reported improvement in per tonne profits from the lows of 23 a tonne in the September quarter to 490 in the December quarter, while Ambuja’s Ebitda per tonne doubled from 433 in Q2 to 812 in Q3, according to analysts’ estimates.

Performance of cement companies is likely to continue improving, said analysts. While cost pressures eased significantly, it was still not visible for companies in Q3 as fuel prices remained quite volatile, they added.

In the March quarter, cement manufacturers could see per-tonne profit rise further by about 200-300 a tonne and the average crossing 1,000 per tonne, said analysts. If companies raise cement prices, it will add to their profitability.

Emkay Global analysts said demand from the retail segment was range-bound in January, and healthy traction in government-backed projects continued. In the retail segment, festivities as well as extreme winter conditions led to slower construction in the North. Prices, however, were flat in January compared to the previous month. The government’s push for infrastructure is expected to keep cement demand strong in 2023, ahead of the 2024 election year.

Capacity addition in the cement sector will continue to meet demand, said Rajesh Ravi. The Adani group’s aggressive expansion plans for its acquired cement assets may take a back seat for the near term due to the recent developments, said analysts.

Motilal Oswal Financial Services Ltd analysts said Ambuja Cements should have be better clarity on capex (both for capacity enhancement and operational efficiencies). The firm’s organic expansion will need more time, it lacks a clear roadmap, and has not considered significant expansions in its estimate, barring the 7 mtpa of Ambuja Cements, which was disclosed in January 2022 by its erstwhile management, they said.

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