The cement demand in the country is set for a third straight year of growth with a 7-9% jump to about 425 million tonne (MT) in fiscal 2024, while the outlook for operating margins remain clouded.
The operating margins, which were under pressure due to elevated prices of key inputs such as coal and petcoke, will have a bearing on the credit risk profiles of players, according to a report by Crisil Market Intelligence & Analytics.
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.
The 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 has risen by 25% on a year-on-year basis and the National Highways Authority of India by 14%. 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.
“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,” Hetal Gandhi, director (research) at Crisil Market Intelligence and Analytics, said.
The growth in operating margins looks uncertain against the backdrop of about 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.
“After hitting a decadal low of sub-10% in the second quarter of this fiscal, the industry’ margin improved 390 basis points (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,” Koustav Mazumdar, associate director-research at Crisil Market Intelligence and Analytics, said.
Disparity in hike in cement prices and cost pressures culled operating margin to about 13.6% over the first nine months of this fiscal, down 800 BPS on year and lower than the decadal average of 17-18%. But while coal prices remain elevated, international petcoke prices have begun easing since the second quarter of this fiscal (about 23% on-quarter decline) and dipped further (3% quarter-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, it added.