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  • Why we are cautious about cement sector stocks

    Publish date: 24th August, 2018


    The cement sector’s performance in the first quarter of FY19 was broadly in line with analysts’ expectations. The volume growth during the quarter kept the sector afloat amidst rising prices and increasing costs. Going forward, the story has not changed a great deal.

    Here is why analysts are cautious about cement stocks.


    1) Weak trend in prices
    The pan-India price of cement for the month of August is Rs 329 per bag. This is Rs 10 lower compared to the same period in 2017. This fall in prices is expected during the monsoon season. Heavy rainfall in states like Kerala has impacted the demand during the month.

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    2) High input costs due to rise in fuel prices

    Pet coke and diesel are two important input materials for the production of cement. And during the month of August, cement companies saw their input costs go up when pet coke prices and diesel prices increased. Imported pet coke prices witnessed a 12% rise to $125 per ton from 1QFY19. Similarly, domestic pet coke prices increased by 8% to Rs 9,950 per ton. A 2% QoQ rise in diesel prices also added to the cost pressures in the sector.

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    3) Industry volumes increase aided by infrastructure
    The sector saw a rise in volumes by 13% to 2.86 crore tons in June 2018 on a YoY basis. However, this volume growth comes off a weak base in 2017 where demand declined by 3% during the same period last year. The rise in volumes in the past few months has been led by an increase in infrastructure activity.

    Conclusion

    A weakening Indian rupee against the dollar, rising input costs and expensive valuations means that it is best to take a cautious stance on the sector. In addition, the current price trends signal a weak second quarter earnings report card for pan-Indian cement companies.


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