Operating margin of domestic asbestos cement sheet (ACS) makers will increase ~50 basis points (bps) to 10-10.5% this fiscal, compared with 9.5-10% in fiscal 2023, following stabilisation of freight cost and lower fluctuation in foreign exchange rates. Besides, intense competition and narrowing price spreads compared with substitute products (refer to chart 1) will limit the ability to fully pass on increase in chrysotile asbestos fibre (CAF) price to customers.

However, operating margin will remain below the five-year average of ~13% seen up to fiscal 2022, largely because of elevated prices of CAF amid continuing Russia-Ukraine conflict.

Globally, ~70 countries have banned the use of asbestos because of pollution concerns. India has not done so given the government’s focus on rural housing. ACS roofing is predominantly consumed in rural hinterland due to affordability, price competitiveness and durability compared with alternatives.

India consumes ~25% of the global production of CAF, of which 70-80% is used to make ACS roofing. Russia, Brazil, and Kazakhstan together account for ~90% of global supply of CAF. Indian ACS makers procure CAF mainly through Russian suppliers.

In fiscal 2023, CAF prices surged ~50% due to the Russia-Ukraine conflict and factors such as rupee depreciation and spiking freight costs due to logistical challenges. This also led to ACS makers stocking up on CAF to ensure supplies, pushing up inventory levels. The trend is expected to continue this fiscal.

An analysis of major ACS makers, which account for over 90% of the oligopolistic sector’s revenue of ~Rs 4,600 crore (11% of overall domestic roofing sector), indicates as much.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “With CAF prices elevated and intense competition, revenue in the ACS roofing segment may see only a modest growth of 6-7% this fiscal versus 10% last fiscal. However, overall revenues of ACS makers will be higher, supported by sales of non-asbestos products, which are expected to grow 20% this fiscal, the same pace as last fiscal. That’s because, product diversification initiatives over the past 4-5 fiscals have helped de-risk revenue dependence on ACS, leading to its share in overall revenue declining to ~62% last fiscal from ~72% (refer to chart 2) in fiscal 2018.”

Domestic ACS makers witnessed a steep increase in working capital borrowings last fiscal due to higher stocking to tackle supply disruptions and longer freight routes due to geopolitical issues in key CAF supplying markets. Besides, suppliers resorted to advance payment against the earlier practice of 30-60 days’ credit. Even though freight costs began easing towards the end of last fiscal, inventory levels remain elevated as the supply chain has not completely normalised. Hence, working capital levels will continue to remain high this fiscal as well.

Says Naren Kartic K, Associate Director, CRISIL Ratings, “In view of elevated CAF prices, companies have refrained from material addition to their ACS roofing capacity. As much as 70% of the incremental capex of Rs 600-650 crore this fiscal will be to enhance capacities for non-ACS products. Higher debt levels for capex and incremental working capital needs will lead to some moderation in debt metrics. They will remain adequate nonetheless, leading to ‘stable’ credit profiles.”

CRISIL Ratings expects the gearing and interest cover ratios for major ACS makers at 0.40-0.50 time and ~6 times in fiscal 2024 compared with 0.14 time and ~27 times, respectively, in fiscal 2022.

That said, factors such as impact on rural incomes due to a possible El Niño effect on monsoon, regulatory risks associated with use of asbestos-related products, ban on mining of asbestos in major producing countries, and further flare-up in geopolitical risks impacting CAF supplies, will bear watching in the road ahead.