ICRA: Increase in cement prices likely to result in better operating profitability in the near term

Cement prices have been on an increasing trend since March 2019, supported by improved demand. This along with easing in the freight expenses owing to the increase in the truck axle load norms, (w.e.f Q2 FY2019), is likely to result in relatively higher operating profitability in the near term. ICRA expects margins in Q1 FY2020 to show an improvement compared to the corresponding period previous year. 

Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings adds: “Improved cement demand and offtake during FY 2019 resulted in improved supply-demand situation which was reflected in improved pricing trends since March 2019. Further, there was an increase in the cement prices in the range of Rs. 30-70/bag in most markets in April – May 2019 on a Y-o-Y basis. In addition, on the cost-side, there was an easing of pressures on the freight expenses supported by revision in the truck axle load norms, which came into place in July 2018. Further, there was a moderation in diesel and pet-coke prices over the last 5-6 months which is likely to benefit the cement companies in Q1 FY2020 on a Y-o-Y basis. While the improved capacity utilisation is likely to support the recent price increase, the supply side pressure on prices in some regions cannot be ruled out completely.” 

The prices increased in March 2019 on an M-o-M basis in Mumbai (by Rs.15/bag), Kolkata (by Rs. 25/bag), Bengaluru (Rs. 50/bag), Chennai (Rs. 60/bag) and Hyderabad (by Rs. 75/bag) markets. There were some price increases in April-May 2019 as well. The prices are higher by Rs. 35-40/bag in Mumbai, Rs. 55-60/bag in Delhi, Rs. 35/bag in Chandigarh, and Rs. 60-70/bag in Hyderabad markets in 2M FY2020 on a Y-o-Y basis. 

The cement production was higher by around 13% Y-o-Y in FY2019 as compared to 6% Y-o-Y growth in FY2018. The double-digit growth rate of FY2019 is likely to get moderated in FY2020. ICRA expects demand growth of 7-8% in FY2020 given the government's continued focus on the housing sector and rural economy in the Union Budget for 2019-20. Further, the continued thrust on the roads and railways is likely to push cement demand. Given the limited capacity addition in FY2020, the industry's utilisation is likely to improve to 72% in FY2020 from 65% in Fy2018.

Mr. Majumdar adds, “In some regions such as North, North East and East, the cement players' utilisation is likely to be higher than the national average, this is expected to result in better pricing power in these regions. However, in other regions such as South and West, the utilisation is likely to remain muted given the past capacity overhang and the sustainability of price hike here is a challenge.”