ICRA: Cement output grows, but input costs rise, reducing operating margins
The low base effect of the previous year would help support the strong cement output growth.
ICRA Ratings said on Thursday that a rapid increase in infrastructure development since mid-December, as well as robust rural demand, will boost cement production by 12% in FY22. After a demand slowdown in November owing to irregular monsoons, this would be a strong rebound for the sector.
The low base impact of the previous year, when economic activity was reduced due to the pandemic, would also help the robust cement production growth.
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Cement production in India surged by 22% Y-o-Y in Q2 FY22 and 10% compared to Q2 FY20 (pre-covid), owing to robust demand from the housing sector and a pick-up in infrastructure projects.
Compared to pre-covid levels, production is up 5% in the first seven months of FY22. Cement businesses, on the other hand, have been hurt by increased input costs, which are expected to have a negative impact on profits, according to the ICRA research.
In H1 FY2022, key input costs such as raw materials, power & fuel, and freight increased by 16 per cent, 26 per cent, and 7%, respectively, on a year-over-year basis, according to the report.
Higher additive prices, such as slag and gypsum, boosted raw material expenses, as did inward freight costs as diesel prices rose. The surge in coal and pet coke prices contributed to the increase in electricity and fuel cost/MT.
In H1 FY22, coal prices climbed by 103 per cent Y-o-Y, while pet coke prices increased by 81 per cent, according to ICRA. The impact of rising fuel prices has been mitigated to some extent by cement businesses’ increased use of green power and increased efficiencies.
“Despite some easing in the cost side pressures, the input costs are likely to remain elevated in the near term and are expected to exert pressure on operating margins, which are likely to decline by 200 to 230 bps in FY2022. While the capacity additions are expected to increase in FY22 when compared to the previous year, the reliance on debt is likely to be lower owing to the healthy cash generation and strong liquidity of the cement companies. The debt coverage metrics are expected to remain strong in FY22“, Reddy added.