The rise in the cost of fuel, Petcoke, and coal prices has dampened the gross margins of cement companies in the June quarter. The price of pet coke skyrocketed due to the geopolitical tension between Russia and Ukraine.
Petcoke is widely used by the cement industry. The surge in petcoke prices has led to huge uncertainty in terms of costs and margin recovery for cement companies. Adding to the challenges, the domestic coal supply between April and June was diverted to utilities to address the power crisis. And the rise in oil prices has resulted in higher fuel prices, resulting in increased freight expenses.
Cement majors, including Ultratech Cement, Shree Cement, NCL Industries, Sagar Cements, and Nuvoco Vistas Corporation, have all fallen between 25 and 40% from their 52-week highs.
In a recent report by the credit rating agency, Crisil, said that the operating profitability of cement makers will decline 15 percent year-on-year to ₹900-925 per tonne this fiscal, adding to the pain of a 9 percent 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.
Cement prices, on the other hand, may go up by 3-4 per cent, bringing down the operating profitability by ₹150-175 to ₹900-925 per tonne this fiscal, which is a tad higher than the decadal average, it said.
The double-digit growth of 17% in the first quarter, albeit on a low base last fiscal, offers a silver lining, the rating agency said. Furthermore, while growth may slow in the coming quarters and total 8-10% for the fiscal year, it will be the highest since fiscal 2019.
In terms of production costs, petcoke prices remain higher than last year's average despite softening in recent months and so is imported coal, the report said. Power and fuel costs, which account for roughly 30% of production costs, are expected to rise by ₹300 per tonne this fiscal year, and freight costs by ₹10-15 per tonne, as diesel prices remain high.
According to Ankit Kedia, an associate director at the agency, cement production costs may rise by 8–9 per cent as the benefit of softening petcoke and coal prices will be visible only towards the end of the fiscal as the high-cost inventory depletes.
On the credit side, the report stated that higher demand will mitigate the impact of lower profitability on absolute operating profit and cash accruals of cement makers, based on an analysis of 22 cement-makers that account for 85 percent of market volume.
Demand from the infrastructure segment will be aided by government spending, while industrial and commercial demand will be driven by growing investment in data centres and warehousing, and the low base. Off-take from the housing segment is expected to grow 5 percent, taking overall volume growth to 8-10 percent, according to Crisil.
According to the report, the eastern markets are leading the demand drive with a 13–14 percent uptick, largely on a lower base, followed by the central and southern regions at 10 percent each, driven by infra projects.
The northern and western markets—relatively more developed in the rural-urban mix as well as infrastructure—may see mid-single-digit growth.
The report said that the cement sector is set to witness a significant spurt in capex of over ₹27,000 crore this fiscal from under ₹19,000 crore last year. This will not make a dent as most of this capex will be funded largely from internal accruals.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.