Rising costs weigh on profitability of cement companies in coming quarters, says ICRA

Credit rating agency ICRA expects cement demand growth, which has been significantly impacted post demonetisation, to recover to around four to five percent during FY2018, driven by a pick-up in the infrastructure segment, mostly road and irrigation projects and the housing segment.

While improvement in the supply-demand scenario in FY2018 is expected to support the cement prices going forward, rising costs are likely to put pressure on the profitability indicators for cement manufacturers over the next few quarters.

All-India cement production reported a moderate growth of 1.1 percent in 10M FY2017 to 233 million MT, with the growth rate being lower than the 3.6 percent witnessed in 10M FY2016. Cement volumes declined during November 2016 to January 2017 by eight percent when compared to the corresponding previous, significantly impacted by the demonetisation.

 

"ICRA expects demand during FY2017 to remain flat when compared to the previous year. While in the short term, demonetisation has had a negative impact on real estate and construction activities and hence on the cement off-take, the impact is expected to subside and the situation is likely to normalise from Q1 FY2018 onwards," said Senior Vice President and Group Head ICRA Ratings, Sabyasachi Majumdar.

"ICRA expects cement demand growth to recover to around four to five percent during FY2018, driven by a pick-up in the infrastructure segment. Further, the increased budgetary allocation for infrastructure sector, which includes roads, railways, metro, irrigation and housing, during FY2018 will directly and indirectly support cement demand. Also, higher rural credit and increased allocation for rural, agricultural and allied sectors, including the demand for rural housing, are significant contributors to the overall cement demand mix," added Majumdar.

Energy and freight costs are under pressure on the back of rising pet coke, coal and diesel prices during Q3 and Q4 FY2017. Pet coke prices have been increasing during FY2017 and reached a high of around Rs. 6700/MT in October 2016, before dipping marginally by three percent in November 2016 and remained stable since then.

Significant price rise for pet coke during Q3 FY2017 (57 percent on YoY basis) has seen 11 percent higher rates during 9M FY2017 as compared to 9M FY2016. Given the large usage of pet coke across companies and the low cost pet coke inventory being exhausted by the companies, the full impact of this price rise is expected to be visible during Q4 FY2017.

In addition to this, there has been a nearly 12 percent increase in diesel prices during 9M FY2017 on a YoY basis. The trend has continued during January and February 2017, wherein diesel prices have increased by 28 percent and 32 percent respectively on a YoY basis. This is likely to put pressure on the freight costs of cement companies.

"While cement plants from the northern region are likely to pass on the rising power, fuel and freight costs on account of a significant increase in the cement prices on a YoY basis, the profitability of cement plants from other regions is expected to be under pressure during Q4 FY2017. The slowdown in the pace of new capacity addition and improvement in the supply-demand scenario in FY2018 should support capacity utilization levels and cement prices going forward. However, rising costs continue to put pressure on profitability indicators for cement manufacturers, in coming quarters," added Majumdar.