The rising input costs of crude oil, petcoke, and coal, along with the fall in demand, have dampened the gross margins of major cement companies in the September quarter. The industry has been experiencing high costs since the start of the Russian-Ukraine war.
The September quarter is typically a dull period for the cement sector due to the monsoon. As a result, companies have been unable to pass on rising raw material costs to consumers, which has resulted in a drop in operating margins.
Power and fuel costs, which account for roughly 30% of cement manufacturers' production costs, have risen sharply in Q2. According to trading economics data, imported coal (FOB Australia) peaked at $450 per tonne in September, but prices have cooled down since then and are currently trading at $325. However, since the beginning of the year and the start of the Russian-Ukrainian conflict, coal prices have increased by 108% and 35%, respectively. Apart from higher coal and pet coke prices, the rise in crude prices has added pressure to the operating costs of the industry.
At the end of Q2 FY23, analysts estimated the profit margins of the cement majors would fall due to a rise in fuel costs, and they also expected that the recent price hike in cement prices would not translate into gains for the cement companies.
In September, credit rating agency firm CRISIL estimated in its report that the operating profitability of cement makers will decline 15% year-on-year to ₹900–925 per tonne this fiscal, adding to the pain of a 9% decline last fiscal, as an increase in realisations will not be enough to offset the increase in prices of coal, petcoke, and diesel that has pushed the average cost of production higher.
The agency also said power and fuel costs will rise by ₹300 per tonne this fiscal and freight costs by ₹10–15 per tonne as diesel prices remain high.
For the September-ending quarter, cement Major Ultratech Cement posted a 42% drop in its consolidated net profit to ₹758.70 crore from ₹1,310.3 crore in the same quarter last year. The total expenditure of the company jumped nearly 15.61% to ₹13,982 crore in Q2 from ₹12,016 crore in the corresponding quarter of last year.
The cost of production of the Ultratech cement increased 8.7% QoQ to ₹5,317 per tonne due to higher power and fuel expenses. As a result, EBITDA/tonne declined by 50.6% YoY and 30.6% QoQ to Rs. 775/tonne, ICICI Direct Research said.
In Q2, the cost of fuel increased to ₹2.489/Kcal from ₹2.215/Kcal in Q1 FY23 and ₹1.43/Kcal in Q2 FY22. With the fall in international coal and pet coke prices, the company expects a minimum cost reduction of over ₹100 per tonne from Q3 onwards, ICICI added.
Similarly, rival Ambuja Cements, which is now part of the Adani Group, reported a fall of 94.24% in its consolidated net profit at ₹51.30 crore compared to ₹890.67 crore in a similar quarter of the previous fiscal. Total expenses for the company came in at ₹7,179.90 crore, up nearly 30% from ₹5,543.51 crore a year ago.
Shree Cement reported a 67.5% drop in consolidated net profit to ₹183.24 crore in the second quarter ended September 2022, owing to higher power and fuel costs. The company posted a consolidated net profit of ₹563.94 crore in the same quarter last fiscal.
Total expenses stood higher at ₹3,956.9 crore compared to ₹2,798.3 crore, with power and fuel costs at ₹1,377.79 crore, up from ₹726.75 crore a year ago.
Other cement companies, Ramco Cements posted a 99.28% YoY drop in its consolidated net profit in Q2 FY23. India Cements also reported a consolidated net loss of ₹113.26 crore for the second quarter that ended in September 2022.
Adding to that, JK Lakshmi Cement posted a 29.21 percent decline in consolidated net profit at ₹61.79 crore for the September quarter as against a net profit of ₹87.29 crore in the corresponding quarter of last year.
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