Input Costs Putting Pressure on Cement Manufacturer's Profitability: ICRA

Rise in input costs have exerted pressure on the profitability of cement manufacturers, which is bound to adversely reflect in its Q4 FY2021 performance, ICRA said in a note.

Input costs have risen over the last few months as the prices of major input materials - coal, pet coke and diesel - are on an upward trend, resulting in higher power, fuel and freight expenses.

"The rise in these costs, which account for 50-55 per cent of total costs, has been exerting pressure on the profitability of the industry players," the note said.

On the input costs front, the note cited that the increase in coal prices in recent months is majorly driven by higher demand from China and other Asian countries.

"The prices of diesel and pet coke increase in line with crude oil prices. The recent surge in oil prices led to an increase in pet coke prices by 73 per ceny YoY and 29 per cent QoQ in Q4 FY2021 and diesel prices by 20 per cent YoY and 10 per cent QoQ," it said.

Consequently, cement companies have undertaken price hikes by around 7 per cent YoY in March 2021 to pass on the increase in the power, fuel and freight expenses.

According to the note, the recent increase in cement prices are likely to sustain in the near term supported by significant uptick in construction activity driven by healthy rural housing demand and infrastructure led demand.

Besides, in an attempt to preserve liquidity during the Covid-19 pandemic, players have deferred capacity additions in FY2021 as against the earlier estimates of around 20 million MT, and actual addition is estimated to be in the range of 14-16 million MTPA, the note said.

"The capex is likely to get back to around 21-22 million MT in FY2022 which will increase the aggregate debt levels for the industry," it said.