Cement: GST may hit volumes, while high input costs could limit margin expansion
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To the Street’s surprise, cement manufacturers posted better-than-anticipated volume growth in the March quarter. Following the November demonetisation of high-value banknotes, expectations were that cement volumes would take a hit. While production data showed a 12% year-on-year (y-o-y) decline, cement companies reported an aggregate growth of 6.5% y-o-y. For some, the sharp surge in volumes was also due to the base effect.
Region-wise, eastern markets grew 6% y-o-y in the March quarter, followed by the north that registered a modest growth of 3%. Growth in the south market was flat, said a JM Financial Institutional Securities Ltd report.
On the other hand, in the central market, the key state of Uttar Pradesh saw a decline due to sand availability issues, whereas Madhya Pradesh was stable. Volume growth in the western part of the country was impacted by muted demand. For the full FY17 fiscal year, the southern region saw maximum volume growth.
Realizations grew y-o-y, but declined sequentially. Higher realizations can be partly attributed to the price hikes taken by firms during the quarter and partly to the increased proportion of value-added and premium products, analysts said.
However, concerns on surging costs remain. Operating costs for all cement makers spiked on account of higher petroleum coke prices. Power and fuel costs have been rising steadily, and so are freight costs.
Aggregate operating costs surged 6.1%, the highest increase in eight quarters, pointed out a Nirmal Bang Institutional Equities Research report. India Cements Ltd and Mangalam Cement Ltd reported the highest increases of 21% and 17% in operating costs, respectively. This took a toll on cement companies’ profitability.
Volume growth in the June quarter is likely to decline due to subdued demand and the supply-chain disruptions caused ahead of the implementation of the goods and service tax (GST) starting 1 July. Apart from that, the implementation of the Real Estate (Regulation and Development) Act and the Benami Transactions Act is likely to have a negative impact on cement demand from the urban housing segment. The saviour for cement demand is largely government infrastructure spending. The Benami Transactions Act is aimed at cracking down on so-called benami properties—those which are held by proxies on behalf of the real owners.
Also, input costs are expected to continue to head northwards, limiting operating margin expansion. As per recent dealer channel checks, all-India cement prices have declined from the month-ago levels. Pricing remains key as profitability in terms of Ebitda/tonne is likely to be under pressure in 1QFY18 on cost escalations and lower operating leverage. Ebitda stands for earnings before interest, taxes, depreciation and amortization.