Operating profitability of cement-makers in India will decline about 15% to Rs900/tonne to Rs925/tonne in fiscal 2023, adding to the pain of a 9% decline previous fiscal, as an increase in realisations will not be enough to offset the rise in prices of coal, petcoke and diesel that have pushed the average cost of production higher, says a research note.
However, according to a report from CRISIL Ratings, the 17% growth in cement demand during the first quarter of the fiscal, albeit on the low base of the previous fiscal, which was hit by the second wave of COVID-19, offers a silver lining. "Though growth may taper in subsequent quarters, and print at 8-10% for the full fiscal, it would still be the highest since fiscal 2019."
The higher demand will mitigate the impact of lower profitability on absolute operating profits and cash accruals of cement makers, cushioning their credit profiles, indicates CRISIL analysis of 22 cement companies, accounting for 85% of the market volume in the country.
Koustav Mazumdar, associate director of CRISIL Research, says, "Cement volume growth this fiscal will be driven by non-housing segments, where offtake is expected to rise more than 15%. Demand from the infrastructure segment will be aided by government spend, while industrial or commercial demand will be driven by growing investment in data centres and warehousing and the low base of the previous fiscal. Offtake from housing segment is expected to grow ~5%, taking overall cement volume growth to 8-10%."
According to the report, eastern India, including the northeast, will lead the demand growth, at 13-14%, largely on a lower base. "The central and southern regions may see around 10% growth, given demand from key infrastructure projects. The northern and western regions, which are relatively more developed in terms of the rural-urban mix as well as infrastructure, may see mid-single-digit demand growth."
Prices of two raw materials, petcoke and imported coal remain higher and would affect product costs for cement makers, CRISIL says, adding, "Power and fuel costs, which account for up to 30% of the production cost of cement manufacturers, may rise about Rs300 per tonne this fiscal. Similarly, freight costs will be Rs10 to Rs15 per tonne higher, tracking diesel prices that remain high despite some stability of late."
Ankit Kedia, associate director of CRISIL Ratings, sees cement production costs rise 8%-9% this fiscal year, given that the benefit of softening petcoke and coal prices will be visible only towards the end of the fiscal year as the high-cost inventory depletes.
"Cement prices, on the other hand, may go up by just 3%-4%, bringing down the operating profitability of cement makers (earnings before interest, taxes, depreciation and amortisation-EBITDA per tonne) by Rs150-Rs175 to Rs900-Rs925 this fiscal. This will still be a tad higher than the decadal average," he says.
According to the rating agency, the cement sector has seen significant consolidation over the past several years, resulting in the strengthening of business profiles. "Acquired assets have been turned around even as companies have scaled up, leading to a reduction in financial leverage of the sector to less than one time (measured as the ratio of net debt to Ebitda). This will keep the debt protection metrics stable despite moderation in profitability, thereby sustaining the credit profiles of cement makers."
Further, CRISIL says a significant spurt in capex to more than Rs27,000 crore this fiscal from less than Rs19,000 crore in the previous fiscal will not make a dent as most of this capex would be mainly funded from internal accruals.
"That said, any significant delay in softening of petcoke and coal prices or inability of companies to increase cement prices will bear watching," it added.