Retail prices of cement, after rising by an average Rs 10-15 per bag pan-India since August, are likely to go up another Rs 15-20 over the next few months and touch all-time highs of Rs ~400 per bag (see chart 1 in annexure) this fiscal because of high prices of inputs such as coal and diesel (see chart 2 in annexure).

But the earnings before interest, tax, depreciation, and amortisation (Ebitda) of cement makers will decline by Rs 100-150 per tonne this fiscal because of high input costs (see chart 3 in annexure). Cement sales volume is expected to rise 11-13% on-year this fiscal, albeit on a low base. This will largely offset the impact of cost pressure on cash accruals and keep credit profiles stable. A CRISIL Ratings analysis of 17 cement companies, which have a volume market share of 75% in India, indicates as much.

Says Isha Chaudhary, Director, CRISIL Research, “Cement volume growth will be driven by demand revival across segments ― infrastructure, housing and industrial ― as the impact of Covid-19 wanes. Cement demand saw a robust growth of over 20% in the first half this fiscal, but should moderate to 3-5% in the second half, primarily because of a high-base effect, translating to 11-13% growth for this fiscal.”

At the regional level, south India witnessed the steepest hike of Rs 54 per bag in October over the previous month, followed by the central region with Rs 20 per bag. The north saw a hike of Rs 12 riding on healthy demand, while in the west, which is the key outbound region for the south, the price increased by Rs 10 per bag. The east saw a moderate increase of Rs 5 per bag. But the entire hike in retail cement prices would not reflect in the realisations of cement makers as sales to cost-conscious, non-retail channels would increase in the second half of the fiscal. Consequently, pan-India cement realisations are seen up 7-8% on-year, or Rs 350-400 per tonne this fiscal.

The recent rally in prices of imported coal (up more than 120% on-year in the first half) and petcoke (up 80%) is likely to increase power and fuel costs by Rs 350-400 per tonne (up ~40% on-year) this fiscal as a large part of the cost inflation is yet to be absorbed. Energy-efficiency measures such as increasing use of alternative fuel source, stocking inventory for a quarter, and long-term contracts, though, will shield the industry from the full impact of the cost hike.

Freight costs are also likely to increase Rs 50-75 per tonne (up ~5% on-year) despite factoring in the recent excise duty cut on diesel by the central government and several states.

Says Ankit Kedia, Associate Director, CRISIL Ratings Ltd, “While the cost pressure may gradually abate given the softening of coal and diesel prices from October levels, it will take 2-3 quarters to meaningfully reflect in the cost of production. Therefore, the operating profitability of cement makers, or Ebitda per tonne, is expected to moderate by Rs 100-150, or by 300-400 basis points, this fiscal. Absolute profits, however, won’t be affected as higher volume will offset the impact of moderation in margins.”

Consequently, healthy cash accruals, low gearing, and high liquidity will keep the balance sheets of cement makers strong and debt protection metrics stable, thereby sustaining their credit profiles.

Any significant increase in Covid-19 caseloads relating to the new omicron variant can affect the ongoing economic recovery and will thus bear watching.