Why are cement company results under pressure in Q2FY23

Why are cement company results under pressure

Indian Market
by 5paisa Research Team Last Updated: 2022-10-18T17:41:32+05:30

There is a problem of costs that cement companies are facing. Of course, bulk of the cement companies re yet to come out with results. However, we have already seen results coming from 2 major cement majors viz. Shree Cements and ACC Ltd. Let us understand why these results were disappointing.

Why the results of ACC and Shree Cements were disappointing?

Shree Cements saw a fall of nearly 67% in its profits on a yoy basis for the Q2FY23 quarter. It did managed a decent top line growth with growth in volumes and pricing power. However, the profits took a bit hit. Even in the case of ACC, the pressure was visible as a net loss of Rs87 crore was reported by the company in the September 2022 quarter. In both the cases, the reason was almost similar. Both Shree Cements and ACC Ltd saw a sharp spike in their power and fuel costs which nearly doubled on a yoy basis. In addition, these companies also faced severe pressure due to a spike in the transport and freight cost. Let us look at the numbers in slightly greater detail.

For instance, in the case of ACC, the net loss of Rs87 crore is in sharp contrast to a net profit of Rs450 crore in the corresponding quarter of last year. Of course, it is now well known that the Adani group has a controlling stake in ACC and Ambuja Cements by virtue of buying out their stake from Holcim of France. Even in the case of ACC, the revenue from operations was up 6.42% at Rs4,057 crore, but the cost pressures really piled on the power and fuel costs. After all, industrial power costs have gone up very sharply in the last one year and cement, as we all know is both power intensive and also freight intensive.

Both the companies saw a sharp 30% spike in the total expenses which resulted in the deterioration of operating profits amidst almost static to marginally higher sales revenues during this period. The ACC top management as well as the CEO of Shree Cements admitted that there had been significant cost pressures in the recent past. This had been primarily caused by the steep fuel price rise. However, both the companies are hopeful that with the recent cooling of energy costs and the fall in oil prices, things should stabilize. The only hope for the two companies is that the 2 million bpd supply cut by OPEC does not spoil the show.

The problems for the cement industry stem from the unique nature of this industry. It has its limestone costs under check, so raw materials is not the issue. The real concern is on the power and fuel costs and the transport and freight cost. The two are often related since power and fuel costs have strong externalities and also tend to rub off on the transport and freight costs on an average. For now, the best that these cement companies can do is to hope that these prices start to taper. For now, recession fears have kept global commodities under check. However, once growth impulses return, then commodities may once again become expensive. The cement industry is surely looking ahead at an uncertain period.

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