Cement Makers' Price Hikes to Support Margins

The recent price increases by India's cement companies will counter the higher energy costs, Fitch Ratings said on 18th May. Besides, the impact on their profitability from a resurgence of the coronavirus is likely to be limited, it said. Fitch expects cement deman

BY Realty Plus
Published - Wednesday, 19 May, 2021

Cement Makers' Price Hikes to Support Margins

The recent price increases by India's cement companies will counter the higher energy costs, Fitch Ratings said on 18th May. Besides, the impact on their profitability from a resurgence of the coronavirus is likely to be limited, it said. Fitch expects cement demand to be less affected by the restrictions to curb the spread of Covid-19 this time around, while the larger cement companies' strong profitability in the financial year ended March 31, 2021 (FY21) should cushion their financial profiles against downside risks. "Key energy commodities, including petroleum coke, imported coal and diesel, which together account for more than 50 per cent of cement makers' costs rose sharply, particularly after Q3FY21," it said. However, the impact on cement companies' costs was less apparent in Q4FY21 as they switched to using lower priced imported coal and benefitted from lower-cost inventories and a lag in adjustments in freight costs. "We expect the impact to be more visible in Q1FY22, but the mid-single-digit price increases by the cement companies after Q3FY21 will help to cushion the overall impact on their per ton profitability. The fresh curbs to contain the resurgence of coronavirus in India after March 2021 are more localised," the ratings agency said. Furthermore, Fitch cited that unlike last year, manufacturing plants and construction sites can operate in most states and there is significantly less disruption to logistics services and labour availability. Nonetheless, the localised curbs, which are effective in the majority of states, could cause cement demand to drop by more than 20 per cent in Q1FY22 from Q4FY21. We expect cement demand from rural housing, which accounts for nearly a third of total domestic demand, to decrease to a larger extent as it is more dependent on individual customers. In comparison, demand for cement from other segments, such as urban housing, infrastructure and commercial construction, is likely to be less affected because these segments are less dependent on retail sales. Fitch expects the economic impact of the latest restrictions to be less severe than those last year, which should drive pent-up demand for cement after the curbs are eased. We believe this should support moderate recovery in cement demand in FY22 from FY21 levels unless stricter or wider restrictions are imposed. In addition, it pointed out that recovery after 1HFY21 in previously weak segments, including infrastructure and urban housing, supported volume growth in 2HFY21 while per ton profitability improved due to resilient prices and the companies' cost optimisation steps. This strengthened their financial structures and flexibility, which will allow them to better manage volatility from the resurgence of the pandemic in India.