Surging costs expected to keep cement companies’ profits under pressure in FY19

Our Bureau Despite an increase in demand, the profitability of cement companies will come under pressure due to an escalation in production costs.

The growth momentum in cement production is expected to continue this fiscal and the industry is likely to report a growth of 6 per cent to 316 million tonnes (mt).

The output in FY18 was up 6.3 per cent at 298 mt, against 280 mt in FY17.

The bulk of production growth was reported in the second half of FY18, largely due to lower base effect.

Sabyasachi Majumdar, Senior Vice-President, ICRA, said growth in cement production is expected to be driven by a pick-up in the affordable and rural housing segments as well as infrastructure (primarily road and irrigation projects).

Budget 2019 has provided for higher rural credit, increased MSP, more allocation for rural, agricultural and allied sectors along with continued focus on Pradhan Mantri Awas Yojana and infrastructure investments, he added.

Cement production increased by 10.6 per cent and 18.2 per cent respectively in the December and March quarters of last fiscal. Production was in the range of 26-27 mt between December 2017 and February 2018 and increased to 28.5 mt in March.

Rising demand resulted in an increase in cement prices in the Ahmedabad and Hyderabad markets respectively by ₹20 a 50 kg bag and ₹10 a bag in April. However, rising supplies resulted in prices remaining range-bound in the Kolkata market.

Higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) will put pressure on the profitability margins and debt metrics of the cement companies.

Hence, the ability of the industry players to secure increases in cement prices remains critical from the profitability perspective, said Majumdar.

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