Petcoke usage a negative for cement sector

Petcoke usage a negative for cement sector
04/12/2017 , by , in ALLIED

Performance of the Indian cement sector may get impacted by the ban on petcoke usage and sand-mining, according to a Jefferies report.

Based on this view, the brokerage firm downgraded Dalmia Bharat Ltd. to ‘Hold’ from an earlier ‘Buy’ rating, while keeping target price on most of its peers below current market price.

Petcoke ban was introduced by the apex court in three states- Rajasthan, Uttar Pradesh and Haryana on October 24, keeping in mind the pollution levels in Delhi-NCR.

As a result of the petcoke ban, companies based out of this region had to move to imported coal, which led to a 30 percent increase in the cost of fuel on a kcal basis, said Jefferies in their report. This will directly impact the operating income of the companies negatively. The impact could be in the range of 2 to 11 percent depending upon the extent of petcoke usage, the report added. Some of them have already raised their prices by Rs 15 to 20 per bag in the region.

Shree Cement Ltd. will be the most impacted from the pet coke ban, as 71 percent of its capacities lie in the three banned northern states, according to the report.

On the other hand, ban on sand-mining is impacting demand in at least five states: Tamil Nadu, Bihar, Uttar Pradesh, Rajasthan and Punjab. All India volume growth will remain subdued in the second half of the current financial year, the report added.

Capacity constraints and higher costs remain the blanket issue with the cement industry after the implementation of the petcoke and sand mining ban.

Dalmia Bharat may be a top performer in the cement sector but may not be able to clock a double-digit volume growth this time for these reasons:

  • High capacity utilisation in eastern plants
  • Low demand in south and north-east
  • High raw material and energy costs

Therefore, due to a lack of near-term triggers and rich valuation, Jefferies downgraded the company.

On Ultratech Cement Ltd. , Jefferies said that integration with cement plants of Jaiprakash Associates Ltd. was a “positive surprise” but how will the company manage to sustain higher costs remains to be seen.

Regarding the merger between ACC Ltd. and Ambuja Cements Ltd., Jefferies is of the opinion that the synergies of the merger will flow only 24 to 36 months after the merger. ACC may face capacity constraints and Ambuja will grow in-line with the industry, it said.

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