Note ban: Profit margins of cement cos to come under pressure, says Ind-Ra

The profit margins of cement companies may come under pressure on the back of falling demand and rising operational cost post demonetisation.

The impact of demonetisation will flow to the economy mainly through the real estate and construction sector, which has strong linkages with cement and steel and they will turn credit negative in the short-run, said India Ratings in a statement on Tuesday.

Post demonetisation, the all India cement demand declined 20-25 per cent in November-December while pan-India realisation declined by about Rs 15-Rs 20 a bag in the same period.

Cement production is likely to grow by 4 per cent in this fiscal against the earlier estimate of 4 per cent.

The lower cement output for FY17 is expected due to the fall in production over last two months.

In last eight months, cement production recorded a growth of 4.5 per cent with November witnessing the lowest growth of just 0.5 per cent.

On the other hand, price of pet coke, which is a key raw material for cement companies, moved up to $60-$70 a tonne from $40 a tonne recorded in April. The rise in pet coke prices coupled with increase in diesel prices is likely to increase power, fuel and freight costs for companies.

The higher input cost and lower demand is expected to limit the ability of cement manufacturers to pass on the higher prices to the end consumers, thus potentially squeezing margins.

Cement demand from housing sector, which accounts for 65 per cent of total cement sales, is likely to declined further. The demand from individual home builders may increase due to a better monsoon. However post demonetisation the cash availability with individual home builders will be limited, said the rating agency.

The working capital requirement of most cement companies may increase due to additional credit given to dealers, as most of dealers shift to digital payments, it said.

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