Recent price hikes to arrest margin fall
Though cement prices are hiked to an extent, they may not offset the rising costs significantly.
The cement manufacturers have bitten the bullet much ahead of the beginning of new demand season and raised prices by 3-5 per cent by end of June, mainly to partly cover their rising input costs. However, the price rise was in the range of 3-5 per cent for the retail segment and the hike was not effected for the bulk consumers having more bargaining power, according to dealers.
Cement prices have remained range bound in the past four years. They are mainly driven by regional capacity, utilisation levels and demand within the region. Pricing scenario in FY18 was soft as all-India average realisation did not witness any improvement.
Rise in input prices, particularly pet coke and diesel prices, besides logistics costs, have lead to this development. A persistent spike in pet coke and diesel prices remains a major headwind for the industry. Pet coke prices, which surged by approximately 22-25 per cent in FY18 (2017-18), continued to move northwards in FY19 too. Industry's power and fuel costs and freight cost together surged by approximately Rs200-300/tonne in last one year. Rising global crude prices is threatening to distort the plans of several companies, including the cement sector. Region-wise, western and eastern regions, driven by demand from infrastructure, housing and commercial real estate, are enjoying favourable demand conditions to record higher price for cement.
Both competitive pressures and some players-trying to boost their market share by giving better offers-seem to cap the rise in cement prices. Aggressive market share chasing by some players, particularly larger ones, in the wake of strong demand trends has resulted in pricing pressure, said Vivek Maheshwari, Investment Analyst from the leading investment house CLSA in a report in mid-June 2018. He cited the example of UltraTech Cement that has ramped-up its acquired-JPA utilisation to ahead of the industry level of about 75 per cent in less than 12 months.
In June 2017, when UltraTech acquired JPA, its capacity utilisation was around 20-25 per cent (the previous year was about 35 per cent) and by March 2018, utilisation was ramped up to at 85 per cent, which implies significant market share gains.
"An improvement in demand conditions, however, induced aggressive volume pushes by several companies across micro markets... Feedback indicates the push was much higher by the larger players. This clearly signals a fight for market share which resulted in pricing pressure at a time when costs have been rising, says Maheshwari, while adding, as a result, unit earnings before interest, taxes, depreciation and amortisation (EBITDA) for coverage is down to Rs 820/tonne in 4QFY18, and current pricing and cost trends suggest the spot margin could be down by another Rs 70-Rs 125/tonne.
This comes at a time when costs are trending up leading to a double impact on its margin. "This clearly signals a fight for market share which resulted in pricing pressure at a time when costs have been rising," But with the industry hiking the prices to cover at least a part of the incremental/rising costs, that bodes well for the operational profits of the companies in the sector.