Economy

Cement cos’ profit under pressure despite demand growth: ICRA

Our Bureau Mumbai | Updated on March 29, 2019 Published on March 29, 2019

The sharp increase in cement sales in the last 10 months of this fiscal is unlikely to result in a major turnaround in cement companies’ profitability due to their inability to pass on the rise in incremental cost to consumers.

The cement industry had registered a production increase of 13.6 per cent to 276 million tonnes in the first 10 months largely driven by demand from rural and affordable housing sectors.

However, it may not translate into any meaningful profit growth or improved margin as companies could not secure any significant price increases amid significant cost pressure, said ICRA.

Sabyasachi Majumdar, Senior Vice-President, ICRA, said volume growth should be around 8 per cent next fiscal on the back of focus on affordable housing demand and improved focus on infrastructure segments mainly road, metro and irrigation projects.

“We expect capacity addition of about 17-18 million tonnes per annum by next fiscal. With the incremental demand of about 24-28 mtpa being higher than supply, capacity utilisation should improve,” he said.

However, capacity overhang is likely to keep the utilisation at moderate levels of 69 per cent in this fiscal and 71 per cent in FY20, he added.

Cement prices in most markets were down by 3-8 per cent in the first 11 months of this fiscal. This, along with higher input costs, had put pressure on the profitability of the cement companies.

However, input cost has been easing in the recent months driven largely by lower power and fuel expenses. The fall in crude oil prices led to cheaper pet coke and lower freight expenses. The increase in the truck axle load will also bring down transportation cost. In addition, cement price was hiked in February and March.

“The price increase and cost easing is too recent to have a meaningful impact on profits this fiscal. Moreover, the sustainability of price hike will be crucial given the excess supply in the market,” said Majumdar.

Published on March 29, 2019
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