Rating agency CRISIL's latest study suggests that input cost pressure would push cement prices to an all-time high. It states that while retail prices of cement have risen Rs 10-15 per bag pan-Indian since August, with another similar spike expected in the few months to reach all-time highs of about Rs 400 per bag, this would not translate to higher EBITDA for cement makers. CRISIL states that EBITDA could instead decline by Rs 100-150 per tonne in this fiscal because of higher input costs.
The rating agency accredited the data from an analysis of 17 cement companies holding a volume market share of 75 per cent in the country.
The report also suggests that cement sales volumes are expected to rise 11-13 per cent because of a lower base year. Cement demand was muted last year owing to restrictions to curb the spread of the coronavirus. The rating agency suggests this would largely offset the impact of cost pressure on cash accruals and keep credit profiles stable.
According to data gathered by CRISIL, cement demand rose more than 20 per cent in the first half of the current fiscal. This is expected to moderate to 3-5 per cent in the second half as the lower-base effect fades away. "Cement volume growth will be driven by demand revival across segments âÂÂÂÂÂÂÂÂ infrastructure, housing and industrial âÂÂÂÂÂÂÂÂ as the impact of Covid-19 wanes," says Isha Chaudhary, Director at CRISIL Research.
CRISIL mentions that southern India witnessed the steepest hike in cement prices in October compared to the previous month, followed by central India, northern India, western India and then eastern India. Down South, the prices of cement rose Rs 54 for each bag in October, Rs 20 a bag in the central region, Rs 12 a bag in northern India and Rs 10 a bag in western India. Eastern India witnessed the lowest price hike at Rs 5 per bag.
"But the entire hike in retail cement prices would not reflect in the realisations of cement makers as sales to cost-conscious, non-retail channels would increase in the second half of the fiscal. Consequently, pan-India cement realisations are seen up 7-8% on-year, or Rs 350-400 per tonne this fiscal," CRISIL states.
CRISIL expects the recent spike in prices of imported coal petcoke would increase power and fuel costs by Rs 350-400 per tonne this fiscal. Energy-efficient measures such as increasing the use of alternative fuel sources, stocking inventory for a quarter, and long-term contracts would shield the cement industry from the cost hike. The rating agency expects freight costs to increase by Rs 50-75 for each tonne despite the recent lowering of excise duty on diesel by the central government and states.
“While the cost pressure may gradually abate given the softening of coal and diesel prices from October levels, it will take 2-3 quarters to meaningfully reflect in the cost of production. Therefore, the operating profitability of cement makers, or Ebitda per tonne, is expected to moderate by Rs 100-150, or by 300-400 basis points, this fiscal. Absolute profits, however, won’t be affected as the higher volume will offset the impact of moderation in margins," said Ankit Kedia, Associate Director at the rating agency.