Rising costs to pressurise profitability of cement cos: Study

Despite pick-up in cement demand in Q1 FY 19, higher coal, pet coke prices and freight costs in the near-term are likely to put pressure on the profitability margins and debt metrics of the cement companies, a report said.

Domestic cement demand registered a healthy growth of 14.2 per cent Y-o-Y in Q1 FY2019. This buoyancy has however not been translated into improved financials for the sector. The rising supplies have restricted any significant increase in cement prices. which remained flat in Q1 FY2019 on a QoQ basis. They declined by around 5-6 per cent on a pan- India level in Q1 FY2019 on a YoY basis.

 

In addition, rising costs continue to put pressure on the profitability of the cement companies in FY2019, rating agency Icra said in its report here.

Overall, we expect the demand to show a growth of around 6-7 per cent in FY2019, primarily driven by a pick-up in the affordable and rural housing segments and infrastructure, mainly road and irrigation projects, in addition to the low base effect of FY2018," ICRA Ratings senior vice president Sabyasachi Majumdar said.

Cement production remained in the range of 27-28.6 million metric tonnes (mmt) during the April 2018-June 2018 period, clocking the highest at 28.6 mmt in June 2018. In April 2018, the production continued to remain healthy at 27.3 mmt, an increase of 16.7 per cent on a YoY basis. It increased on an MoM basis by 2 per cent in May 2018 to 27.8 million MT and by 2.8 per cent in June 2018.

It has continued to remain healthy since January 2018 and this was supported by the demand in Andhra Pradesh and Telangana, driven by irrigation, low cost housing and infrastructure projects, the eastern markets driven by low cost housing and infrastructure demand and western Indian markets led by execution of infrastructure projects. Rural housing saw a pick-up, post monsoons, due to the improvement in the rural economy, following normal monsoons.

In Q1 FY2019, cement prices declined in most markets such as Delhi, Chandigarh, Kolkata and Hyderabad. However, prices in Ahmedabad have been higher by 2.8 per cent. Last year, in April 2017, cement prices were hiked, post demonetisation in most markets, which resulted in higher cement prices in Q1 FY2018. Also, the demand and the prices are likely to remain under pressure in Q2 FY2019 due to the monsoons.

"In addition to pricing pressures, higher power and fuel like increase in coal and pet coke prices and freight costs of increase in diesel prices in the near-term are likely to continue to put pressure on the profitability margins and debt metrics of the cement companies," Majumdar reiterated.