Cement Prices Key To Profits
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Mr.Sabyasachi Majumdar, Senior Vice-President, of the rating agency ICRA in their report stated that cement production is expected to grow at 6%-7% in the current fiscal year, driven by pick-up in affordable housing and rural housing segments and infrastructure spending primarily roads and irrigation.
According to the rating agency, Indian cement production remained healthy in the first four months of FY19, reporting a 14.7% year-on-year (YoY) growth. Production remained in the range of 27.5 MMT-28.6 MMT during the April-June period, clocking the highest at 28.6 MMT in June. It declined in July by 9.3% on a month-on-month (MoM) basis owing to the monsoons, when cement consumption is usually on the lower side. However, it did remain high by 10.8% on a YoY basis, at close to 26 MMT.
However, rising costs are likely to put pressure on the operating profitability of Indian cement companies in the coming quarters. Cement manufacturers' ability to secure price increases remains the key to profits.
The trend was supported by demand, driven primarily by low-cost housing (in South India - AP and Telangana; and in Eastern India - except Bihar) and a pick-up in the execution of infrastructure projects (in South - AP and Telangana and in the East and West India).
On the capacity side, estimates are that around 17-19 MTPA will get added in FY19-20, primarily in the East and Central regions. However, the actual production from new capacities could be lower, given that a disproportionate part of the capacity addition is largely grinding as opposed to clinker capacities.
While the additions have moderated, expectations are that the capacity overhang is likely to continue to keep the industry's capacity utilisation level below 70%, over the next two years. Lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger cement players.
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Cement Prices Stable
While in the North and South, the prices are on the lower side by Rs 25-30 per bag, the prices in the east are largely similar in the first five months of FY19 (YoY).
The pressure on prices will continue in the second quarter of FY19, owing to the monsoons, which usually have an adverse impact on cement demand.
Hence, the higher power, fuel cost due to increase in coal and pet coke prices and freight costs owing to increase in diesel prices in the first half of FY19 and in the coming quarters are likely to continue to pressure profitability margins and debt metrics of cement companies in the near term, according to the report.
Mr.Sabyasachi Majumdar, Senior Vice-President, of the rating agency ICRA in their report stated that cement production is expected to grow at 6%-7% in the current fiscal year, driven by pick-up in affordable housing and rural housing segments and infrastructure spending primarily roads and irrigation.