Cement Q2 Preview: D-street expects profitability to be hit hard, margins under pressure – know headwinds impacting sector

Cement Q2 Preview: Dalal Street expects the cement sector is expected to report mute numbers in the July-September quarter of the financial year 2022-23 (Q2FY23) with profitability likely to be at a multi-quarter low and margins may witness pressure amid multiple headwinds such as lower prices and higher costs.

Global brokerage CLSA in its preview for the sector said, “We expect margins to recover in Q3FY23 on lower fuel prices and benefits of operating leverage. Demand has been quite resilient, growing by high single-digit year-on-year (YoY), while prices have fallen by 3-6 per cent quarter-on-quarter.”

The demand outlook and price increase post-festive season (October-end) would be key to watch for, the global brokerage said. It added, “Over the medium term, with utilisations remaining low, the price increase would be difficult to come by despite increasing consolidation.”

Given a well laid out organic growth roadmap and relatively cheaper valuations, CLSA prefers UltraTech over Ambuja as it gives Outperform rating to the former and Sell stance to the latter.

In line with CLSA’s expectations for the sector, HDFC Securities also believe profits to be hit hard YoY basis on account of sharp energy inflation in Q2 and expects the margin to recover December-end quarter onwards, driven by cost cool-off and rebound in cement prices.

HDFC Securities maintains BUY ratings on UltraTech, ACC, Dalmia Bharat, Nuvoco Vistas, Birla Corp, Star Cement, JK Lakshmi, and Sagar Cements, while ADD ratings on Ramco Cement and Deccan Cement.

Even ICICI Direct Research expects operating margins in the cement sector to get further squeezed in Q2FY23 as the impact of higher international petcoke/coal would be fully visible. On the positive side, the sales volume of most cement companies is expected to grow 11.2 per cent YoY in Q2, it added.

“While profitability for Q2 may remain at multi-quarter low, we expect margins to recover from Q3 onwards on softening of international fuel prices, pick-up in construction activities, post-monsoon, and a better pricing environment,” ICICI Direct also believes the same that of CLSA’s view.