Buoyed by the infrastructure-focused Union Budget, cement demand is set for its third straight year of growth with a 7-9% jump to ~425 million tonne (MT) in fiscal 2024.

However, the outlook on operating margin, which has been under pressure, remains clouded with the prices of key inputs – coal and pet coke – remaining elevated. This will have a bearing on the credit risk profiles of players.

Cement demand grew 11% on-year in the first 10 months of this fiscal, led by rapid execution in infrastructure projects and strong traction in the real estate and rural affordable housing segments. The momentum is likely to stay healthy in the remaining months of this fiscal as it is a seasonally strong period for construction activity across regions.

Next fiscal would again see the infrastructure and affordable rural housing segments propelling growth. The highest traction is expected from roads, where the total outlay for the Ministry of Road Transport and Highways and the National Highways Authority of India has risen 25% and 14%, respectively, on-year.

The outlay for affordable rural housing under the Pradhan Mantri Awas Yojana – Gramin (PMAY-G) has also grown 12.5% in a pre-election year.

Says Hetal Gandhi, Director - Research, CRISIL Market Intelligence and Analytics, “Strong demand is likely to lead to incremental sales volume of 30-35 MT in fiscal 2024 after a cumulative rise of 68 MT over fiscals 2022 and 2023. This translates into a demand growth of 30% since fiscal 2021, taking the total volume to ~425 MT in fiscal 2024. Demand growth is likely to be starker in central and eastern regions, which account for over 80% of PMAY-G construction.”

However, growth in operating margin looks uncertain against the backdrop of ~80% rise in power and fuel cost — comprising 30-35% of production cost — since fiscal 2021. The increase has been driven by a steep rise in coal and petcoke prices owing to global supply constraints, which were further aggravated by the Russia-Ukraine conflict.

Disparity in hike in cement prices and cost pressures culled operating margin to ~13.6% over the first 9 months of this fiscal, down 800 basis points (bps) on-year and lower than the decadal average of 17-18%.

But while coal prices remain elevated, international petcoke prices¹ have begun easing since the second quarter of this fiscal (~23% on-quarter decline) and dipped further (~3% on-quarter) in the third quarter, in tandem with crude oil prices. Domestic petcoke prices have followed suit. Further, easing of coal and pet coke prices were witnessed over January and February 2023, which will support margins going ahead.

Says Koustav Mazumdar, Associate Director - Research, CRISIL Market Intelligence and Analytics, “After hitting a decadal low of sub-10% in the second quarter of this fiscal, the industry’ margin improved 390 bps sequentially in the third quarter to 13.8% with the softening of fuel prices and the impact of cement price hikes. A meaningful recovery in operating margin, however, will depend on sustained softening of fuel prices. Conversely, an increase in input prices could delay recovery and can impact both margins and credit profiles of cement players.”

In the milieu, a drastic escalation in the Russia-Ukraine conflict, which may affect demand-supply and petcoke and coal prices, would be a key monitorable.

¹ US Petcoke- 6.5% sulphur