Indian cement firms strong H1 FY20 profitability limits Covid risks: Fitch

The strong margins in the first half of the financial year (H1 FY21) limit the risks to Indian cement companies' financial profiles, despite lower volumes due to the Coronavirus (Covid-19) pandemic, says Fitch Ratings.

The companies are expected to take a prudent approach to grow capital expenditure in FY21 (ending March 2021), which will underpin healthy free cash generation and support financial flexibility. A gradual revival in cement demand, following the Q1FY21 drop of more than 30 per cent, could cap the overall FY21 decline to low double digits.

Demand has remained steady and companies don't expect a sharp drop in H2 FY21 due to the gradual stabilisation in previously weaker segments, even as the boost from the 1HFY21 backlog fades. Per tonne profitability is likely to fall in H2 FY21 as fuel and energy prices normalise and companies pursue volume more aggressively amid recovering demand. Nonetheless, we believe a strong operating performance in H1 FY21 has significantly reduced downside risks, said Fitch.

Large producers, including UltraTech Cement, ACC Ltd and Ambuja Cements, subsidiaries of LafargeHolcim Ltd, and Shree Cement, reported higher year-on-year volume in Q2FY21. This was boosted by healthy demand from rural India and the affordable housing segment as well as a steady renovation component that offset weak new build activity in urban housing, infrastructure and commercial construction.

The pent up demand also kept selling prices firm during May and June, with the initial easing of pandemic-related lockdowns coinciding with a rush to complete construction ahead of the monsoon.

Lower energy and fuel costs - which together account for nearly 60 per cent of total cement production costs - and fixed cost savings helped increase the per tonne margins from a year ago and cushioned the overall decline in operating profit from weaker volume, it added.

Prices declined in the seasonally weak Q2FY20, but remained firm on a yoy basis. This reflected continuing stabilisation in demand and a disciplined approach to pricing following increased industry consolidation over the past few years.

Overall, most large companies posted higher per tonne and overall operating profitability, despite higher energy and fuel costs from Q1FY21. This resulted in broadly stable or improved operating profit generation in H1 FY21 from a year ago.

India's cement demand in FY22 is expected to rise by high single digits from a low base in FY21. This would be in line with the country's broader economic stabilisation and an increase in infrastructure and commercial construction projects. Deferred new capacity additions from 2020 should also support profitability.