Cement cos’ profits likely to crumble under cost pressure

Despite a robust demand, cement companies’ profits are expected to come under pressure in June quarter due to a sharp rise in input costs especially that of pet coke and diesel.

Led by a sustained pick-up in infrastructure spending and firm rural demand, sales volume of top cement producers such as UltraTech Cement, ACC, Ambuja Cement, Shree Cement, JK Cement, JK Lakshmi Cement, India Cement and Ramco Cement are expected to register an average 20 per cent growth in the June quarter.

Input costs rise

However, the average cement prices during the quarter was down five per cent year-on-year even as cost pressures increased due to high energy prices and depreciating rupee.

The all-India average cement prices declined by ₹3 per 50 kg bag to ₹328 in June, after a ₹4-5 increase in the previous two months.

Petcoke prices have been increasing for the last 15 months and cement companies have managed to pass on the incremental cost partially by hiking cement prices.

However, after a certain level they were not able to increase prices due to excess supply in the market. The sector is bogged down by excess capacity.

Binod Kumar Modi, Senior Research Analyst, Reliance Securities, said further hike in cement prices looks imminent to sail through high cost pressure, as any meaningful reduction in fuel prices seems unlikely in the medium term.

To tide over the rising logistics cost, cement companies have changed commercial terms on freight to FOB (free on board) from ex-factory. Under the new terms, cement dealers are made to share logistic costs and this improved cement companies margins in the last quarter.

Monsoon progress crucial

Going ahead, a normal monsoon is important to sustain demand in rural regions which has seen construction activities reviving in the last couple of months.

While progress of the monsoon was moderately below normal last month, it has recovered and has been widespread across the country which bodes well for cement demand, he said.

Capacity addition

Pritam Deuskar, Fund Manager, Bonanza Portfolio, said the industry is expected to add about 126 million tonne production capacity to take the overall capacity to 600 mt by FY20.

The capacity addition is being largely led by UltraTech Cement, Dalmia Bharat, JK Cement and Ambuja Cement.

With the current capacity utilisation hovering at 72 per cent, the new capacity addition may be delayed by a few months but it will add more pressure on cement companies.

Source: THE HINDU BUSINESSLINE