Rising input costs may hit cement companies profit margins: Report

Cement companies are likely to face pressure on their profit margins and debt metrics in the near term on rising prices of pet coke, coal and diesel, a report said today.

Rating agency Icra in its report said higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) in the near term are likely to continue to put pressure on the profitability margins and debt metrics of the cement companies.

"Hence, the ability of the industry players to secure increases in cement prices remains critical from the profitability perspective," its senior vice president Sabyasachi Majumdar said.

The coal prices were higher by 24 per cent and diesel by 6.9 per cent year-on-year in financial year 2017-18, while the pet coke prices increased in Q1, Q2 and Q3 of FY18 by around 54, 16 and 20 per cent, respectively, the report said.

The government in December last year increased the import duty on pet coke to 10 per cent from 2.5 per cent earlier, which according to Icra is expected to keep the pet coke prices at elevated levels.

Meanwhile, the rating agency pegged the cement demand to register a moderate growth of around 5-6 per cent in FY19, primarily driven by a pick-up in the affordable and rural housing segments and infrastructure - mainly road and irrigation projects.

"The FY19 budget also provides support in this direction with higher rural credit, increased MSP, increased allocation for rural, agricultural and allied sectors, along with continued focus on the PMAY and infrastructure investments," Majumdar said.

In the first 11 months of FY18, while the cement production was 270 million tonnes, an increase of 5.8 per cent YoY, the demand increased faster by 15.2 per cent during October 2017-February 2018, according to Icra, backed by low-cost housing in Andhra and Telangana and infrastructure demand from the eastern, southern and western markets.

With the sand availability issues continuing to impact the demand in Rajasthan, Bihar and Tamil Nadu, the agency expects the capacity overhang and the moderate demand growth to continue to keep the industry's capacity utilisation level at close to 65 per cent over the medium term.