Despite a high double-digit demand growth, the profitability of cement companies is set to fall by 15 percent because price hikes lag an increase in production cost, according to a report.

Share Market Live

NSE

The report by rating agency Crisil, however, said higher demand will cushion the credit outlook for the sector.

Operating profitability of cement makers will decline 15 percent year-on-year to Rs 900-925 per tonne this fiscal, adding to the pain of a 9 percent decline last fiscal, as an 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, the agency said in a report on Monday.

However, the 17 percent demand growth in cement demand during the first quarter, albeit on the low base last fiscal, offers a silver lining, the report noted, saying though growth may taper in subsequent quarters, and print in at 8-10 percent for the full fiscal, it will still be the highest since fiscal 2019.

Also Read: Exclusive: GST slaps biggest ever show cause notice of Rs 21,000 crore to Gameskraft Technology

On credit profile, the report, based on an analysis of 22 cement-makers that account for 85 percent of the market volume, said higher demand will mitigate the impact of lower profitability on absolute operating profit and cash accruals of cement makers.

According to Koustav Mazumdar, an associate director at the agency, volume growth will be driven by non-housing segments, wherein off-take is expected to rise more than 15 percent.

Demand from the infrastructure segment will be aided by government spending, while industrial/commercial demand will be driven by growing investment in data centres and warehousing, and of source the low base. Off-take from the housing segment is expected to grow 5 percent, taking overall volume growth to 8-10 percent.

According to the report, the eastern markets are leading the demand drive with a 13-14 percent uptick, largely on a lower base, followed by the central and southern regions at 10 percent each, driven by infra projects.

Also Read: Samvardhana Motherson to acquire Ichikoh's mirror business in Rs 293 crore deal

The northern and western markets -- relatively more developed in the rural-urban mix as well as infrastructure -- may see mid-single-digit growth. As for production cost, petcoke prices remain higher than last year's average despite softening in recent months and so is imported coal.

Power and fuel cost, accounting for around 30 percent of production cost, is likely to rise by Rs 300 per tonne this fiscal and freight cost by Rs 10-15 per tonne, tracking diesel prices that remain high.

According to Ankit Kedia, an associate director at the agency, cement production costs may rise 8-9 percent as 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 3-4 percent, bringing down the operating profitability by Rs 150-175 to Rs 900-925 per tonne this fiscal, which is a tad higher than the decadal average.

Also Read: Unilever CEO to quit at 2023-end as investors question credibility

The sector is set to witness a significant spurt in the capex of over Rs 27,000 crore this fiscal from under Rs 19,000 crore last year will not make a dent as most of this capex will be funded largely from internal accruals.