Higher coal prices, slowdown in demands may impact cement industry profitability in FY23

Cement dispatches have shown a slowdown recently amid rising construction costs, lower development budget and higher freight costs, as 9MFY22 transmissions were down 6%. Hence, experts believe political noise, economic slowdown and rising cement bag costs could further impact dispatches. Hence, we expect total cement dispatches to clock in at 54mn tons in FY22 (down 6% YoY) and 51mn tons in FY23 (down 5% YoY).

Along with the lower dispatches, rising coal cost is another key concern for the sector as global supply chain disruption, and Russia-Ukraine has kept the commodity prices elevated thus far. Richard bay coal prices have averaged ~US$182/ton in FY22TD and are currently hovering around US$286/ton.

In 1HFY22, cement companies used a mix of Afghan, Russian and local coal, which was around 20-30% cheaper than the Richard Bay (South African coal). This resulted in earnings growth of 53% as companies were able to increase cement prices and contain their cost simultaneously.

However, going ahead in FY23, we believe that coal costs from other sources, including Afghan Coal, Russian Coal and local Coal, would gradually rise as cement players will have to procure Coal at a higher price. These players were carrying an inventory of around 3-4 months. We have assumed Richard Bay coal at ~US$225/ton in FY23 and an average Cement Price of Rs950/bag. We also believe that due to the expected slowdown in dispatches, further cost pass on could be difficult for manufacturers.

Resultantly, the gross margin of Topline Cement Universe is likely to fall to 15% in FY23 vs 24% expected in FY22.

Due to the rise in coal prices and lower dispatches, Topline Cement Universe Earnings (Core Cement) is expected to post a 16% decline in FY23.

Players in the North region are better placed due to the lower inland freight cost of local & Afghan Coal. They are currently using 50-60% Afghan coal.

We currently have a Market Weight stance on the sector with a ‘Buy’ stance on LUCK, MLCF and a ‘Hold’ call on DGKC and KOHC.

Courtesy – Topline Securities

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Posted in Cement & Steel News.

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