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Pet coke import ban looms large over cement stocks

ET Intelligence Group: Even after the Supreme Court lifted the ban on the use of petroleum coke, or pet coke, in cement production, the possibility of imports of the fuel being halted due to environmental concerns looms large.
If the import of pet coke is banned, analysts may cut their FY19 earnings per share (EPS) estimates of large cement companies by as much as 10 percent. 

Pet coke accounts for 60 percent to 100 percent of the fuel used by some large cement manufacturers. According to studies, pet coke emissions of greenhouse gases that cause global warming are 11 percent higher than those produced by coal. 

A ban on pet coke imports would exacerbate business prospects for cement manufacturers, hurting their earnings growth while already grappling with weak demand and the lack of sand, a raw material. 
Power and fuel account for Rs 750- Rs 900 – or 25 percent– of the cost of producing 1 tonne of cement. If a ban on imports were to be introduced, it may further drive pet coke prices higher, adding to production costs and capping earnings growth for cement companies. Pet coke prices in the US traded at $105 per tonne in November, a two-year high. 
Of the 23.3 million tonnes of pet coke consumed in India, almost 14 million tonnes was produced domestically, while 40 per centwas imported. 
In addition, the price of imported coal has been rising, leaving little scope for a cheap alternative fuel that can be used by cement manufacturers .
The valuation of cement companies is a key concern. Considering FY19’s estimated earnings, the average EV/EBIDTA range of most large cement companies such as UltraTechBSE -0.12 %, ACC, Ambuja CementsBSE 0.15 % and Shree Cement is 13-15, which is high compared with the 10-year average range of 7-10. 
Given these factors, it makes sense for investors to hold on to their existing investments and enhance exposure in cement stocks only on dips.

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