Sharp rise in input cost dents cement firms’ profitability

Power and fuel, and freight expenses account for 50-55 per cent of the total costs for cement manufacturers and the cost of production is likely to be higher by 3-4 per cent year-on-year during the current quarter.

A significant increase in input costs has resulted in a steady increase in cement prices across India over the current quarter. However, the rise in retail prices is unlikely to benefit cement companies in the short term. In fact, cement manufacturers are likely to see an impact on their profitability during the quarter, say analysts tracking the sector.

According to research agency ICRA, cement companies have already undertaken price hikes to the tune of around 7 per cent on average year-on-year (3 per cent-8 per cent month-on-month) during March 2021 due to the increase in input costs. “This hike is driven by the increase in the input costs, primarily power and fuel expenses and freight expenses over the last few months. Further, the prices are likely to largely sustain in the near term supported by the healthy rural demand and the significant uptick in infrastructure activity,” it said in a report.

Power and fuel, and freight expenses account for 50-55 per cent of the total costs for cement manufacturers and the cost of production is likely to be higher by 3-4 per cent year-on-year during the current quarter. Coal prices have also increased from $49 per tonne in September 2020 to $88 per tonne in February 2021, and $84 per tonne in March 2021.Pet coke, another key input resource for cement, has seen prices reach Rs 12,600 per tonne in March 2021 from Rs 8,000 per tonne in September 2020. In the fourth quarter of FY21, these prices have been higher by 73 per cent year-on-year and 29 per cent quarter-on-quarter.

The increase in the power and fuel expenses caused by higher pet coke prices and the rise in freight expenses due to higher diesel prices has resulted in a decline in cement companies’ operational profit margins by 8.7 per cent compared to the previous quarter. This figure has been declining since the second quarter of the previous year—falling 7.6 per cent quarter-on-quarter in Q2 FY21 and a 9 per cent quarterly fall in Q3 FY21.

“While the cement prices are likely to largely sustain driven by the significant uptick in the demand, the higher input costs due to the increasing crude oil prices are likely to result in moderation of PBIDTA/MT… With the decline in OPBIDTA/MT, the debt coverage metrics are expected to witness marginal deterioration in FY2022 - TD/OPBIDTA to 1.8x times from 1.6x times and interest cover to 6.4x times from 7.0x times in FY2021,” the ICRA report said.

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