Operating profitability¹ of cement makers will decline ~15% on-year to Rs 900-925 per tonne in fiscal 2023, adding to the pain of a 9% decline last fiscal, as 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.

However, the 17% growth in cement demand during the first quarter of the fiscal, albeit on the low base of the previous fiscal (which was hit by the second wave of Covid-19), offers a silver lining. Though growth may taper in subsequent quarters, and print at 8-10% for the full fiscal, it would still be the highest since fiscal 2019.

The higher demand will mitigate the impact of lower profitability on absolute operating profits and cash accruals of cement makers, cushioning their credit profiles.

A CRISIL Ratings analysis of 22 cement companies, accounting for 85% of the market volume in India, indicates as much.

Says Koustav Mazumdar, Associate Director, CRISIL Research, “Cement volume growth this fiscal will be driven by non-housing² segments, wherein offtake is expected to rise more than 15%. Demand from the infrastructure segment will be aided by government spend, while industrial/ commercial demand will be driven by growing investment in data centres and warehousing, and the low base of the previous fiscal. Offtake from housing segment is expected to grow ~5%, taking overall cement volume growth to 8-10%.”

Eastern India (including the north-east) will lead the demand growth, at 13-14%, largely on a lower base. The central and southern regions may see ~10% growth, given demand from key infrastructure projects. The northern and western regions, which are relatively more developed in terms of rural-urban mix as well as infrastructure, may see mid-single-digit demand growth.

As for production cost, petcoke prices remain higher than last year’s average despite softening in recent months. The same goes for imported coal. Power and fuel costs, which account for up to 30% of the production cost of cement manufacturers, may rise ~Rs 300 per tonne this fiscal. Similarly, freight costs will be Rs 10-15 per tonne higher, tracking diesel prices that remain high despite some stability of late.

Says Ankit Kedia, Associate Director, CRISIL Ratings, “Cement production cost may rise 8-9% this fiscal, given that the benefit of softening petcoke and coal prices will be visible only towards the end of the fiscal as the high-cost inventory depletes. Cement prices, on the other hand, may go up by just 3-4%, bringing down the operating profitability of cement makers (Ebitda per tonne) by Rs 150-175 to Rs 900-925 this fiscal. This will still be a tad higher than the decadal average.”

The sector has seen significant consolidation over the past several years, resulting in strengthening of business profiles. Acquired assets have been turned around even as companies have scaled up, leading to reduction in financial leverage of the sector to less than 1 time (measured as the ratio of net debt to Ebitda). This will keep the debt protection metrics stable despite moderation in profitability, thereby sustaining the credit profiles of cement makers. Further, a significant spurt in capex to more than Rs 27,000 crore this fiscal from less than Rs 19,000 crore in the last will not make a dent as most of this capex would be funded largely from internal accruals.

That said, any significant delay in softening of petcoke and coal prices or inability of companies to increase cement prices will bear watching.

¹ Earnings before interest, tax, depreciation and amortisation (Ebitda)
² Non-housing includes infra and industrial/commercial segments and constitutes 40% of overall demand. The housing sector accounts for the rest.