Input Cost Pressure to Push Up Cement Retail Prices

Retail prices of cement, after rising by an average Rs10-15 per bag pan-India since August, are likely to go up another Rs15-20 over the next few months and touch all-time highs of ~Rs400 per bag (see chart 1 in annexure) this fiscal because of high prices of inputs such as coal and diesel. But the earnings before interest, tax, depreciation, and amortisation (Ebitda) of cement makers will decline by Rs 100-150 per tonne this fiscal because of high input costs. Cement sales volume is expected to rise 11-13% on-year this fiscal, albeit on a low base. This will largely offset the impact of cost pressure on cash accruals and keep credit profiles stable. A CRISIL Ratings analysis of 17 cement companies, which have a volume market share of 75% in India, indicates as much. Isha Chaudhary, Director, CRISIL Research says, “Cement volume growth will be driven by demand revival across segments ? infrastructure, housing and industrial ? as the impact of Covid-19 wanes. Cement demand saw a robust growth of over 20% in the first half this fiscal, but should moderate to 3-5% in the second half, primarily because of a high-base effect, translating to 11-13% growth for this fiscal.” At the regional level, south India witnessed the steepest hike of Rs54 per bag in October over the previous month, followed by the central region with Rs20 per bag. The north saw a hike of Rs12 riding on healthy demand, while in the west, which is the key outbound region for the south, the price increased by Rs10 per bag. The east saw a moderate increase of Rs5 per bag. But the entire hike in retail cement prices would not reflect in the realisations of cement makers as sales to cost-conscious, non-retail channels would increase in the second half of the fiscal. Consequently, pan-India cement realisations are seen up 7-8% on-year, or Rs350-400 per tonne this fiscal. The recent rally in prices of imported coal (up more than 120% on-year in the first half) and petcoke (up 80%) is likely to increase power and fuel costs by Rs350-400 per tonne (up ~40% on-year) this fiscal as a large part of the cost inflation is yet to be absorbed. Freight costs are also likely to increase Rs50-75 per tonne (up ~5% on-year) despite factoring in the recent excise duty cut on diesel by the central government and several states.