Infra, cement cos feel pinch of falling rupee, realty counts on more sales

Despite rise in interest rates and property prices, momentum in housing demand expected to stay, say developers; infra, cement companies remain circumspect

At its recent fourth quarter results conference, the Larsen & Toubro (L&T) management admitted that volatility in the price of crude oil and other commodities arising from geopolitical uncertainties was pushing up input prices.

But there is another elephant in the room.

The rupee has been falling fast against the dollar, putting further pressure on commodity prices and forcing the central bank to intervene.

Last week, the Reserve Bank of India increased the repo rate, pushing up the borrowing cost for companies and consumers. In the last month, the rupee has depreciated nearly 2 per cent against the dollar; since the end of May last year, it has depreciated 7 per cent from 72.45 levels.  

A weak rupee increases the landed cost of imported goods, which also gives domestic manufacturers of such goods the leeway to raise prices.

Moreover, with most of India’s fuel being imported, the cost of transportation and power for companies across industries, including infrastructure, cement, etc. has been on the rise. A weak rupee pushes up these costs further.

S N Subrahmanyan, CEO & MD, L&T, said margins would be impacted in the short term owing to these issues.

"Many of our contracts have a price variation clause. Some of them don't, resulting in some impact on margins when commodity prices increase. Overall, we have to strike a balance, ensure all contracts have a price variation (PV) clause, renegotiate when the price increases are more than the PV clause and hedge for commodity risk,” he said.

The engineering giant isn’t the only company to be contemplating these strategies to mitigate commodity, currency and geo-political risks. In fact, smaller players are at greater risk during times of cost inflation, which also pushes up their working capital requirements.

In its recent report on infrastructure and cement companies, brokerage Sharekhan said these smaller firms would feel the pressure of higher commodity and interest costs in FY23, hurting profitability.

While infra companies are likely to focus on higher order tendering activity to beef up the top line to partly offset margin pressure, cement companies are also at the receiving end.

However, they may continue to increase prices to pass on some of the input cost pressures seen over the last few months. In April, most cement companies raised prices by 8.33 per cent to Rs 390 a 50-kg bag from Rs 360 a bag.

Managing borrowing costs, though, will continue to be a challenge for companies because of higher interest expenses on loans in the short to medium term, said experts.

Logistics and fuel are a large expenditure component for cement companies and, with rising crude prices and a weak rupee, freight and fuel costs will remain elevated. According to Centrum Broking’s Q4 update on UltraTech Cement, power, fuel, freight, and handling  accounted for 55 per cent of the total cost, on a per tonne basis.

“We expect our coverage of cement companies in Q4 of FY22 to report a 23 per cent year-on-year decline in net earnings due to flat volumes and increased cost of production,” said Sharekhan.

“The universe of building material companies could see pricing-led growth that would result in a 29 per cent yearly rise in revenue, though higher raw material and gas prices could drag net earnings down. This trend could continue into FY23,” he added.  

Real estate players, on the other hand, remain bullish about housing demand in FY23, despite the rise in interest rates and increases in property prices due to higher commodity costs.

Pavitra Shankar, executive director at Bengaluru-based real estate company Brigade Enterprises, said that for his customers, borrowing costs will increase, but they would still be very low rates historically.

“We also see the job market and wage growth doing well. This can offset increases in borrowing costs. So, affordability for real estate investors should be minimally impacted. Volatility in the stock market also helps the sentiment for real estate investment,” said Shankar.

For builders, Shankar said there would be a marginal increase in borrowing costs owing to the recent repo rate hike. Brigade, for instance, employed very little debt in its residential business and most of its commercial portfolio debt was lease-rent discounting which was lower than construction finance.

Murali Malayappan, chairman and MD at Bengaluru-based Shriram Properties, has a different opinion, viewing increasing interest rates as an additional pain point, besides input cost pressures, for real estate companies.

"Inflation and (input) cost increases are a matter of concern. I anticipate FY23 to be very turbulent in terms of cost for the real estate sector. We can expect at least a 7-8 per cent increase in costs across projects," said Malayappan.

Yet he did not think buyer sentiment would be overly affected. “Covid-19 has had a huge aspirational impact on home buyers who want to own a home, such that they are willing to accept marginal incremental increases in home loan EMIs,” he said.

Sanjay Dutt, MD of Tata Realty & Infrastructure, said that as real estate remained a hedge against inflation, it would ‘benefit’ in the long run from the interest rate hike.

The rupee’s depreciation did not have a direct impact on buyers, he said. In fact, better job prospects and increases in hiring have led to better salaries.

“Even if property prices were to go up marginally to absorb the cost increase in construction as well as the hike in home loan rates, the impact on buying will not be significant," said Dutt.