The Indian cement industry?s profitability is expected to decline to its lowest level in the past 10 years by 2012-13. A huge demand-supply imbalance, fuelled by supply glut, will drive cement profitability down, said Crisil Research.
The supply glut will slacken cement manufacturers? operating rates, restricting their ability to pass on a sharp rise in power and fuel costs to consumers.
Over the next two years, while cement capacities rise by 60 million tonne per annum (mtpa), demand will increase by a mere 30 mtpa. Operating rates of cement manufacturers will, therefore, plunge to around 72% in 2012-13 from an already subdued 78% in 2010-11.
Cost of power and fuel, a major input for cement, will increase by around 18% in 2011-12, given a steep increase in coal prices by the industry?s dominant supplier, Coal India Limited.
In addition, an increase in effective excise duty rates will lower cement manufacturers? net price realisations by 2%-4%, the research pointed out.
?The magnitude of the demand-supply imbalance and cost escalation will halve the cement industry?s EBITDA margins from the current 20% to around 10% in 2012-13 ? the lowest level in the past 10 years,? said Prasad Koparkar, Head – Industry and Customised Research, CRISIL Research.
Small-sized cement manufacturers ? with capacities of less than 2 mtpa ? are likely to post losses of about 2% at the EBITDA level in 2012-13. Large cement manufacturers ? capacities of 10 mtpa or higher, however, will fare better than the industry average, with EBITDA margins of about 12%.
The key reasons for the better performance of large cement manufacturers will be their greater use of captive power and their inherent economies of scale. These companies meet three-fourth of their power requirements through captive generation. Small cement companies, in contrast, meet a mere 5% of their power requirements through the captive route and source the remainder from the more expensive grid power. ?Captive power can make a critical difference to cement profitability,? Ajay D?souza, Head, CRISIL Research explained.
?Every 10 percentage point increase in captive power consumption can improve cement companies? EBITDA margins by 50 basis points?, he added.
