Eyeing cement stocks? Here are four factors to keep in mind before investing

The Indian cement sector has been seeing multiple triggers in recent times. While the continued focus on infrastructure development by the government has been a supporting pillar, the manufacturers have been facing a cost push due to rising raw material prices. The recent entry of Adani Group with the acquisition of Holcim’s India units, ACC and Ambuja Cement, has created a new competitive flash.

So, what should you do if you would like to bet on the sector for steady growth opportunity for your money?

We present four factors that you need to keep in mind before deciding to press the buy button.

Demand and output

Cement production in India increased to 38 million tonnes in March 2022, up 9% year on year. This is the highest-ever monthly production. For the full year ended March 2022, production stood at 360.5 million tonnes, rising 21% from 2020-21.

Production growth is expected to moderate but remain in the 7-8% range to around 388 million tonnes in the current financial year backed by demand from housing, both rural and urban, and the infrastructure sectors.

Prices

Cement prices rose 7% year on year in April 2022, led by higher input costs. Overall, in FY22, cement prices were higher by 5% from the year before.

Input cost

Coal, pet coke and diesel prices were higher in May 2022 compared with the previous year. Coal prices more than tripled to $276 per tonne in May 2022 as against the same month last year even as the prices declined 4% from April’s level, as trade routes gradually readjusted to the sanctions on Russian coal.

Pet coke prices almost doubled year on year and rose 2% compared with April to Rs 22,300 per tonne. Meanwhile, diesel prices were higher by 9% year on year in May 2022, but declined 7% compared to the preceding month.

Margins

The rising cost of raw materials is likely to put pressure on the operating margins, which are expected to decline by 270-320 basis points to 16.8-17.3% in FY23.

While operating profit before interest, depreciation, tax and amortisation (OPBIDTA) is expected to decline in FY2023, the debt levels would remain range-bound due to lower reliance on borrowings for ongoing capacity additions, according to rating and research agency ICRA.

The total debt to OPBIDTA ratio at 1.4-1.5x and the debt-service coverage ratio at 2.4-2.6x are expected to be healthy in FY2023, it added.