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Cement demand up but profitability pressures continue due to rising costs: ICRA

Published in Corporate Saturday, 14 April 2018 15:39

Even as demand for cement  has picked up from Q3 FY2018 and the trend is expected to continue in Q4 FY2018, with the  growth  expected at around 5% in FY2018 and FY2019, expectation of higher petcoke, coal and diesel prices are likely to put pressure on the profitability margins and debt metrics of the cement companies in the coming quarters.
Says  Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, “We expect the cement demand to show a moderate growth of around 5% in FY2018. A demand pick-up in the recent months, October 2017 to January 2018 by 13.4%, is backed by low cost housing in the eastern markets, Andhra Pradesh and Telangana along with the infrastructure demand from the eastern, southern and western markets. ICRA notes that the sand availability issues persist in Rajasthan, Uttar Pradesh, Bihar and Tamil Nadu, which are adversely impacting the demand in these regions. A pick-up in the affordable and rural housing segments and infrastructure – primarily road and irrigation projects - is likely to continue the demand growth momentum of around 5% in FY2019. Budget FY2019 has provided higher rural credit, increased MSP, and allocation for rural, agricultural and allied sectors and stressed on continued focus on the PMAY and infrastructure investments.”
However, ICRA expects the capacity overhang and the moderate demand growth to continue to keep the industry’s capacity utilisation level close to 65% over the medium-term.
In Q3 FY2018, cement prices remained largely similar on a Q-o-Q basis in most markets, except Hyderabad, where they witnessed a decline by 5%. In other markets a pick-up in the demand supported prices, have continued to remain largely stable in January – February 2018 compared to Q3 FY2018. In the Hyderabad market, the prices were on a declining trend and reached around Rs. 265/bag in November 2017, after which they increased by Rs. 20/bag to Rs. 285/bag in December 2017 and sustained at the same level until February 2018. Overall, in 11M FY2018, the average cement prices in Ahmedabad and Kolkata have been higher by Rs. 45/bag and Rs. 20 - 25/bag respectively on a Y-o-Y basis. While the prices in Chandigarh in 11M FY2018 are largely similar to that in 11M FY2017, those in Hyderabad are lower by Rs. 5-10/bag.
“Lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger players. Further, higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) in FY2018 and in the coming quarters of FY2019 is 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,” Majumdar reiterated.

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