Coal Prices Blacked Out Cement Firms, GMDC Niyveli Shines

Demand for domestic coal from power plants and cement companies has been on the rise. In June-July the imported coal prices had surged 30 per cent. Increase in imported coal prices was more pronounced in October 2016, wherein prices rose by 25% to around $85 per ton from $ 68 per ton in September 2016. Between April and October there have been 60 per cent rise in the imported coal prices. A study of past six months, from June to November, shows that the imported coal prices have gone up over 60 per cent.

Lignite Company’s Gain:

Gujarat Mineral Development Corporation and Neyveli Lignite are likely to profit from rising prices of imported coal in international market. These companies have been weighed down by declining coal prices since FY12. The steep rise in the imported coal prices has made lignite 30% cheaper than imported coal. This may lead to a surge in demand for lignite and also provide GMDC and Neyveli with better pricing power.

Another major gain for the companies will be implementation of GST in the next financial year. Industry experts think that the tax rate for GMDC and Niyveli on lignite could reduce from 37% at present to 12%, post GST.  This is because coal and lignite outside Gujarat are taxed at 12% (VAT plus excise). Lower taxation should increase the company’s volumes, margins and return on capital in the coming years.

But the medium-term benifit will be the rise in international coal prices, which have surged over 60% in the past six months. Currently, imported coal costs Rs 1 per 1,000 kcals, while lignite costs Rs 0.7 per 1,000 kcals. Coal India has cheaper coal to offer but GMDC’s clients do not have that alternative due to logistical issues. This puts GMDC and Neyveli, both, in a sweet spot.

The precise benefit of this will be seen in the coming quarters. Its September quarter numbers were weak due to lower volume from closure from exhaustion of one of its biggest mine Panandhro. But production has been improved in other mines to make up for this. Besides, heavy monsoon also impacted.

While GMDC’s EBIDTA expanded 42% YoY in the June quarter, it declined 8% in the September quarter. The exact advantage of increasing difference between international coal and lignite will be seen in the coming quarters.

Post demonetization and weak results, GMDC share price has fallen 20% from its peak, making it more attractive. It is trading at 3.9 times EV to EBIDTA. This is the lowest amongst all the listed coal and lignite mining companies. Dynamic Levels recommend GMDC among the top 500 performers for the quarter.

Also NLC share price has gained over 2 per cent in three months, witnessing heavy tyrade volume that clearly shows the positive impact of rising imported coal prices on the stock.

Peer Comparison:

Trouble for Cement Companies:

Cement companies are facing margin pressure due to the rising prices of imported coal and Pet coke, a derivative of oil refining, and sluggish demand due to demonetization.

While input costs have risen, the price of cement has come down. While cement prices have slipped in the southern and western markets particularly, volume growth has been negatively impacted in all regions. In south India, the price of a cement bag slipped by Rs 30 during October-November and is around Rs 300 now. In the western markets, after the price upsurged by Rs 15 a bag in October and reached Rs 265 a bag, it declined to Rs 240 in the next month. However, the prices have held in the northern and eastern markets.

These prices of the two fuels are improbable to come down in six months. Experts are estimating on a 15-20 per cent demand drop this month.

Pet coke prices rose 37 per cent between July and December at $95.75 a ton while imported coal prices increased from $52 per metric ton in July to $71.5 as on December 19. Due to the increasing Indian demand and maintenance works at refineries in the US, supply has constricted and this led to a sharp increase in prices during the latter part of the year.

Cement plants rotate between coal and Pet coke. Because of low Pet coke prices last year and early this year, many cement companies had begun using it as a substitute for coal. Fuel accounts for at least 40 per cent of a company’s input costs and cement firms usually store enough to meet the requirements of 45 days.

There may be an effect on the margins of the cement companies. It is the cost advantage which distinguishes a cement maker from others and ensures good operating margins. With both Pet coke and coal prices rising, this advantage is failing.

Experts expect Pet coke prices to ease out in the coming year, but if that does not happen, cement companies may switch to coal. But there is no clearness on the movements of coal prices either. Given the fact that cement demand is driven considerably by real estate, it is likely to get impacted in the near term. Overall, the demand for cement is expected to be negatively impacted by this development in the next two to three quarters.

Movements of Cement Stocks:

Mangalam cement share price has lost over 25 per cent in three months, coming down to Rs.  251.90 on 21^st December from Rs. 339.55 on 23^rd September. Mangalam Cement is the top 500 stock for the quarter as identified by Dynamic Levels.

The Multibagger for the month by Dynamic Levels, JK cements has lost 20 per cent in three months. JK cement share price has come down to Rs. 658.55 on December 21^st from Rs. 824.95 on 23^rd September.

Heidelberg, yet another Multibagger has lost approximately 15 per cent in last three months. Heidelberg share price has come down to Rs. 114.25 on December 21^st from Rs. 134.10 on 23^rd September.

Kakatiya cement share price has declined from Rs. 380 on 23^rd September to Rs. 237.60 on 21^st December 2016 slipping over 37 per cent in past three month. Kakatiya cement is the top 500 performing stock for the quarter as identified by Dynamic Levels.