Difficult quarter for cement industry? Which cement stocks can you still invest in?

Heavy rains and the festival season have led to a roll back of price hikes to pass on high input costs. In Q2 FY22, the all India cement prices have been estimated to be around Rs.369 per bag. The price roll backs and depleted fuel stocks have kept the operational efficiency of cement sector, at a check. There was already an assumption that due to the second Covid-19 wave and a longer than usual monsoon season, the cement volumes would be low. Due to the late arrival of monsoon this year, the July production grew by 22.5% MoM but as expected, the cement consumption slumped in August- September owing to floods, high construction costs, funding issues etc.  The continuous acceleration in crude oil prices and exhaustion of low cost fuel stocks, didn’t help and mostly squeezed the operational performance. The coal prices increased 223% YoY and 55% QoQ. In Q2 FY22 the average price of fuel, diesel, petrol and pet-coke stood at $158 a tonne. A higher diesel price in-turn lead to a higher freight cost. Even though the cement price manufacturers tried their best to pass on the increased price of the inputs, the monsoon along with other factors mentioned before, kept the cement prices in check. According to a report by Anand Rathi, South/East cement prices declined 2.1%/5.3% QoQ due to floods, sand unavailability and high cement supply pressures after a hike in prices in the first quarter of FY22. The North and West prices were up by 3.5% and 4.1% QoQ respectively and the Central regions were steady. According to an ICRA report the cement sector production is estimated to go up 12% to 330m tonnes in FY22. 
Few favoured stocks in the cement sector-

Ramco Cements
Ramco cements is one of southern India’s largest cement companies with a capacity of 19.4m tpa. It is also expanding its operations into the eastern part of India. The company is in the middle of an expansion at various sites to increase the capacity to 20.4m tonnes and also add in clinker capacity expansion, a WHRS and a railway sliding. A capital expenditure of Rs.35 billion is estimated and set aside for this. The strategic location of these factories help in the decrease of transportation cost and thus increase the operational efficiency. 
The ROE in FY21 stood at 14.4% and estimated to decline to 13.6% in FY22 due to the losses faced in this quarter and also due to the pandemic. 

Birla Corp
This company serves the North, East and Central parts of the country.  The reason this company appears in the favoured list is because of its low cost structure, capacity expansion and favourable mix of regions served. Due to the recent acquisitions of coal mines, the fuel costs will be relatively lower than others and lead to maximum optimization of efficiency and resources. In FY 21, the company also reduced its gross debt by Rs.2.36 billion. With this streak of profitability continuing, it can prove to be a good stock to hold in the portfolio for the long term. 

Orient Cements
The main markets of this company is Maharashtra (50%), Telangana/AP/ Karnataka (35%) and MP (10%). The main three markets provide a revenue of 85% to the company. The company has two cutting edge cement manufacturing plants- in Devapur and Chittapur, along with a clinker grinding unit at Jalgaon. It is also planning on constructing a 3m tonne unit in Devapur and a split GU in Maharashtra or AP by FY24. These expansions will help the company gain in volume produced as the market penetration increases.  In FY21, the company repaid Rs. 4.21 billion in debt. A good working capital management will also aid in funding these expansion projects, efficiently. 

Dalmia Bharat
Dalmia Bharat is the Fourth largest cement group with a presence in East, South and North-east India. They have a 33m tonnes capacity. The company has plans to expand its capacity to 48.5m tonnes by FY24. They have a target of 15% CAGR capacity growth. Their main aim is to expand in North and Central India- all India operations, in the next phase of expansions. Also, they are aiming at 14%-15% ROCE in the next few years. As of FY21, the ROCE stands at 8.4%. The company has great focus on expanding into green energy, divesting non-core assets and improving the return ratios as mentioned above.