Indian cement firms strong H1 FY20 profitability limits Covid risks: Fitch
The strong margins in the first half of the financial year (H1 FY21) limit the risks to Indian cement companies' financial profiles, despite lower volumes due to the Covid-19 pandemic, says Fitch Ratings.
The companies are expected to take a prudent approach to grow capital expenditure in FY21 (ending March 2021), which will underpin healthy free cash generation and support financial flexibility. A gradual revival in cement demand, following the Q1FY21 drop of more than 30 per cent, could cap the overall FY21 decline to low double digits.
Demand has remained steady and companies don't expect a sharp drop in H2 FY21 due to the gradual stabilisation in previously weaker segments, even as the boost from the 1HFY21 backlog fades. Per tonne profitability is likely to fall in H2 FY21 as fuel and energy prices normalise and companies pursue volume more aggressively amid recovering demand. Nonetheless, we believe a strong operating performance in H1 FY21 has significantly reduced downside risks, said Fitch.
Large producers, including UltraTech Cement, ACC and Ambuja Cements, subsidiaries of LafargeHolcim, and Shree Cement, reported higher year-on-year volume in Q2FY21. This was boosted by healthy demand from rural India and the affordable housing segment as well as a steady renovation component that offset weak new build activity in urban housing, infrastructure and commercial construction.
The pent up demand also kept selling prices firm during May and June, with the initial easing of pandemic-related lockdowns coinciding with a rush to complete construction ahead of the monsoon.