InvestorQ : Why are cement companies likely to see pressure once again in FY23, despite input costs coming down?
Deepa Salunkhe made post

Why are cement companies likely to see pressure once again in FY23, despite input costs coming down?

Arya Nanda answered.
2 months ago

These estimates are based on a recent report by CRISIL on the outlook for the cement sector in the fiscal year FY23. In fact, CRISIL expects that the operating profits of cement manufacturers in India for FY23 could fall by around 15% to a level of Rs900-925 per tonne. Now, it needs to be remembered that this fall come on top of a 9% fall in cement operating profits in FY22. That means, the overall fall in EBITDA of the cement companies over FY21 would be in the vicinity of 25%. That is a big hit for the cement companies.

According to the CRISIL report, there may not be much of a concern on the top line as demand and prices would still remain robust. However, the problem is that the top line volume growth and realizations may still not be sufficient to offset the spike in the input costs during the fiscal year. That is what could really depress the EBITDA for the full year. Cement demand is likely to see growth in volumes as well as in pricing power. However, the challenge will be in managing costs. But are not the input costs coming down globally?

It is true that oil prices have come down and other commodities are also easing. However, the average prices of most commodities for FY23 would still be higher than in FY22. For instance, power and fuel (accounting for 30% of cement costs) would be higher due to the power shortfall in many regions. Even freight would also be higher. More importantly, the average price of key input petcoke would be still much higher on a yoy basis and that was likely to add to the overall cost of cement by Rs300 per tonne. The fall in EBITDA would be in the vicinity of Rs150 to Rs175 per tonne.

There is good news on the volumes front, although most of the demand is likely to come from the non-housing demand that is likely to show growth of 15% yoy. Here we are referring to the infrastructure sector where the demand for cement would be largely aided by the government spending. On the other hand, the growth in industrial demand would be from data centres and warehousing. CRISIL expects the housing demand to grow by just about 5% and higher interest rates could just worsen the equation. Also, the demand pressure will come more from the established North and Western India markets.

CRISIL has pointed out that in the case of petcoke, much of the inventory is high priced inventory and would take by end of 2022 for the inventory to deplete. Till then the cost pressure would remain. The good news is that despite a 42% spike in capex to Rs27,000 crore in FY23, impact on leverage and interest cost would be minimal as much of this is being funded by internal accruals. However, there are mega expansion of capacity in the anvil by companies like Adani, Ultratech and Shree Cements and that is likely to keep a tight leash on the prices of cement. After all, oversupply is never a good idea.