Operating profit of cement cos hits decade low in Q2. Turnaround on cards now?

The cement sector saw a 360-degree turn in its September quarter earnings performance, particularly on the profitability front, as costs went through the roof.
From a decade-high operating profit per tonne just five quarters back, it fell to a decade low in Q2 due to elevated cost pressures and weak pricing power.
The aggregate cement pack saw around a 45% YoY drop in the operating profit in Q2, the second-highest after the metals and mining sector.
On a 2-year compounded annual growth rate (CAGR) basis, the operating profit for the sector has fallen more than 23%, which is the highest among all sectors, according to Motilal Oswal Securities.

The rise in costs outpaced the growth in realisations for most companies in the previous quarter.
The average rise in the realisation per tonne for the sector was 5% YoY in the second quarter, whereas the rise in operating costs per tonne was more than 20%.
was the worst hit in the pack, as it reported an operating loss per tonne of Rs 405. Its operating profit per tonne was as high as Rs 1,114 in the second quarter of FY21.
saw its operating profit per tonne plunge 98% YoY to Rs 23. It was as high as Rs 1,279 in the June quarter of FY22.
Weighed by the weak profitability, the cement pack saw the second-highest earnings downgrades.
The fall in earnings per share for the sector in the current financial year is estimated to be even higher than the Covid-hit FY21 year, according to Nuvama Wealth Management.
Nuvama Wealth estimates EPS growth to decelerate by 17% in FY23, against the 11% decline seen in FY21.
Post earnings, brokerage Nirmal Bang Institutional Equities, cut the price target for four companies’ shares–Birla Corp, , , and . It downgraded Star Cements and to “accumulate” from “buy”.
MORE PAIN?

After a rough quarter, companies are expecting some respite on the cost front as prices of key raw materials prices started showing signs of cool-off.
A potential global recession could further pull down commodity prices, which should boost the sectors’ profitability, said analysts.

According to Motilal Oswal, energy costs peaked in the September quarter. So, a gradual reduction in energy costs is expected going forward.
Further, demand is also seen recovering, driven by sustained housing demand, and a recovery in the rural segment.
Moreover, cement prices have also improved in some markets of India after having corrected in the seasonally weak Q2.
Therefore, analysts are hopeful that good times are on the way for the sector.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)