Price hikes may not stall cement companies' profit dip: CareEdge

Operating profit margins likely to contract by 320-380 basis points to 16.3-16.8 per cent in FY23, says CareEdge Ratings, as input cost pressures remain

Price hikes of 3-4 per cent by cement companies over the coming months may not be enough to cushion the impact of high input costs this financial year, ratings agency CareEdge (formerly Care Ratings) said on Monday. The agency said operating profit margins of cement companies will likely contract by 320-380 basis points to 16.3-16.8 per cent in FY23 versus the previous year, despite demand firming across sectors. 

This will be the second straight year, said CareEdge, when operating profit margins of cement companies will contract sharply. In FY22, it had fallen by 430 basis points to levels of about 20 per cent versus the previous year, CareEdge said. 

On a per-tonne basis, earnings before interest tax depreciation and amortisation (Ebitda) for cement companies will decrease by Rs 180-200 in FY23, CareEdge said. This will come as the impact of all-input costs, including power and fuel, would push up the cost of production for companies by 350-400 per tonne versus last year, it said.

CareEdge, incidentally, is the second ratings agency after Crisil to flag concerns regarding inflationary pressures on cement companies in recent months.

Last month, Crisil indicated that Ebitda per tonne of cement companies will decline by Rs 150-175 in FY23, despite cement demand growing at 8-10 per cent for the year. CareEdge also predicts cement demand to touch levels of 8-9 per cent in FY23, led by increased government spending on infrastructure and a pickup in real estate activity.

Power and fuel costs, which constitute 30-40 per cent of the cost of production for cement companies, had increased sharply in the July-September period, hurting profitability of firms. Companies as well as analysts had indicated that the second half of FY23 will be better than the first half of the year, amid some softening seen in pet coke and imported coal prices.

Analysts at Mumbai-based brokerage Motilal Oswal said imported coal prices had fallen 18-19 per cent in the last one month, and pet coke, used in cement making, while inching up over the last month, was still almost 28-29 per cent below its peak price seen in the April-June period. “Demand has grown from sectors such as infrastructure and construction. And the market can absorb price hikes of 3-4 per cent,” HM Bangur, chairman, Shree Cement, said, adding that price hikes for the sector will kick in by next month.

Analysts, however, expect companies to be cautious when taking up prices to ensure there is no impact on demand.

While cement prices have improved in the south and east, it was flat in the north, west and central parts of India, analysts at Mumbai-based brokerage Elara Capital. The brokerage house noted in a report last week that price sustainability remained a challenge for most players, forcing companies to be circumspect when increasing prices.