ICRA : Strong cement demand but operating margins to crack under cost side pressures in FY23

20 Apr 2022 , 01:22 PM

The all-India cement production in 11M FY22 at 323 million MT is higher by 22% Y-o-Y and 4% than pre-covid levels of 11M FY21. The demand which was adversely impacted in November 2021 due to due to cyclones and unseasonal rains, picked up from December 2021. The production was higher by 14-15% Y-o-Y in December 2021-January 2022 and by 5% Y-o-Y in February 2022. Based on these trends, ICRA estimates the production to grow by around 18-20% and surpass pre-Covid levels, to reach around 355 million MT in FY22.

Commenting on the demand expectations for FY23, Ms. Anupama Reddy, Assistant Vice President, Sector Head, ICRA says, “The cement demand is expected to grow by 7-8% to around 382 million MT in FY23 supported by strong demand from rural housing and infrastructure sectors. The recent budgetary allocation of over Rs. 9.2 trillion towards agriculture, affordable housing and capital expenditure, primarily in roads and railways, is expected to augur well for cement demand. On the urban real estate sector, the growth in hiring numbers, stable income levels and demand for better and larger homes on account of the shift to the hybrid working model in customer segments working in IT/ITES, BFSI and related sectors is likely to support demand going forward.”

Cement prices have increased by around 4-5% Y-o-Y in FY22, driven by the price hikes taken by the cement companies and to pass on the rising input cost, primarily power and fuel expenses and freight expenses. On the input costs front, the coal, pet coke and diesel prices remained higher in FY22 by 136%, 73% and 18% Y-o-Y respectively. The coal and pet coke prices, which showed some easing in December 2021 — January 2022, started increasing in February — March 2022 due to the Russia-Ukraine crisis. The input costs are expected to remain high in FY23, thus adversely impacting the OPBIDTA/MT of cement companies. ICRA expects the OPBIDTA/MT of cement companies  to decline by 12-15% to Rs. 875-925/MT.

“While the revenues of cement companies are expected to increase by 8-10% in FY23, the high input costs are likely to exert pressure on operating margins, resulting in a contraction by around 270-320 bps to around 16.8-17.3%. While OPBIDTA is expected to decline in FY23, the debt levels would remain rangebound due to lower reliance on debt for ongoing capacity additions. The leverage and coverage for cement players are expected to remain healthy with TD/OPBIDTA estimated at 1.4-1.6x, and DSCR at 2.4-2.6x in FY23,” Ms. Reddy added.