CRISIL Report: Profitability of cement cos may fall 15% due to high input costs

27 Sep 2022 , 06:37 AM

The profitability of cement companies is expected to decline by 15% despite a strong double-digit growth in demand since price increases lag increases in production costs, according to a report.

However, according to research by the rating agency CRISIL, increased demand will improve the sector’s credit outlook.

According to a report released on Monday by the agency, operating profitability for cement producers will fall 15% year over year to Rs900-925 per tonne this fiscal, compounding a 9% decline from the previous year. This is because an increase in realizations won’t be enough to make up for the rise in the average cost of production brought on by higher prices for coal, petcoke, and diesel.

If growth may drop in subsequent quarters and print in at 8-10% for the full fiscal, it will still be the greatest since fiscal 2019, the research said, pointing to the 17% demand growth in cement demand during the first quarter, even though on the low base last fiscal.

According to the agency’s research of 22 cement producers, who together make up 85% of the market’s volume, increasing demand will lessen the impact of reduced profitability on cement producers’ absolute operating profit and cash accruals.

Government spending will support demand from the infrastructure sector, while increasing data centre and warehouse investment, as well as the low base, will fuel demand in the industrial and commercial sectors. Housing-related off-take is anticipated to increase by 5%, bringing the entire volume growth to 8—10%.

The report indicates that the eastern markets are driving demand with a 13—14% increase, mostly from a lower base, followed by the central and southern regions with 10% increases each, led by infrastructure projects. Because of their relatively more established infrastructure and rural-urban mix, the northern and western markets could experience mid-single-digit growth.

Regarding production costs, import coal and pet coke prices are both higher than the average for last year despite recent declines. This fiscal year, power and fuel costs, which make up around 30% of production costs, are anticipated to increase by Rs300 per tonne and freight costs by Rs10-15 per tonne in line with persistently high diesel prices.

The sector is expected to experience a big increase in capex this fiscal year from about Rs19,000 crore, but this increase won’t have much of an impact because internal accruals would cover the majority of this capex.

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