Profitability of cement makers to improve in Q4: India Ratings

India's cement sector is expected to turn the corner from the quarter ended March 31, 2023, as inflationary pressures ease and cement producers pass on the incremental cost to customers, according to India Ratings and Research.

The second quarter of financial year 2022-23 has been the worst in the past several quarters for 20 listed cement companies on account of significant EBITDA and net margin compression due to huge cost escalations, the ratings agency says.

The profitability of cement companies is likely to remain subdued until January 2023, given the limited downside risks to non-coking coal import prices, according to India Ratings.

Cost escalations, which the sector has been experiencing since the start of 2022, persisted during the second quarter. "The cement sector is likely to witness a subdued EBITDA per tonne in the remainder of the financial year on account of continued inflationary pressures of several cost elements," the report says. 

However, there are certain green shoots indicating a probable turnaround in the upcoming quarters, according to Ind-Ra. These green shoots in the form of growth in volumes, increase in net selling price, robust growth in credit deployment towards infrastructure projects and easing of inflationary pressure are likely on account of the plateauing of cost, it says.

Since the quarter ended June 2021, major cement producers have witnessed a steep fall in operating EBITDA per tonne. Although they were able to maintain the growth in realisation per tonne and sales volumes, the increase in power & fuel and freight & forwarding cost parameters was faster which has led to the margin erosion, says Ind-Ra.

While most cost elements have seen a rise in the post pandemic era on account of the inflationary pressures, the steep rise in power and fuel cost per tonne post war has led to companies reporting a sharp erosion in the operating EBITDA per tonne, according to India ratings. The power and fuel cost per tonne for 20 listed cement companies increased 56% year-on-year and 6.5% sequentially to ₹1,786 in the quarter ended September 2022 from ₹919 during the quarter ended September 2020.

The prices of non-coking coal and imported pet coke, which saw a decline and relatively less volatility during the pre-pandemic period, has seen a humongous rise of 2.38x and 2.16x, respectively, as of quarter ended September 2022 compared with quarter ended September 2019, Ind-Ra says.

The steep price hike is the result of the ongoing war between Russia and Ukraine which has led to an energy crisis in Europe, leading to a more-than-usual demand for coal. "The rise in petroleum coke and diesel prices was in line with the price increase of crude and other crude derivatives during the same period," the report says.

Power & fuel and freight forwarding cost which contributed 55% to the total cost during QE September 2019 are now contributing around 61%. The cement sector has been able to maintain the volume growth, however the growth in total cost per tonne has been at a much faster pace than the growth in net selling price since the start of the Russia-Ukraine war, leading to a steep erosion in EBITDA per tonne, says the ratings agency.