Cement producer Dalmia Bharat Ltd’s freight cost/tonne softened to a five-quarter low of Rs884 in the three months ended September (see chart).

Though freight cost surged 3% on a year-on-year basis, it eased sequentially, despite the surging diesel price, which had gone up 7% year-on-year.

Withdrawal of check posts on state borders, post the implementation of the goods and services tax (GST) and the company’s digitization initiatives were the factors that drove freight savings.

As a result, lead distance during the quarter slid to 275km from 295km and that could have resulted in savings of around Rs35/tonne, the management told analysts in a post-earnings conference call. Going ahead, it expects lead distance to remain at these levels. Lead distance refers to the distance travelled by a vehicle carrying cement from the grinding unit to the market.

This trend of declining freight cost is likely to continue. The management expects freight costs to further decline by 3-5% aided by the aforementioned factors.

This would aid Dalmia Bharat to control some operating cost, but it may not be able to pass the savings to consumers. Increased petroleum coke (petcoke) and slag prices pushed the company’s raw material, and power and fuel cost higher in the September quarter.

Slag prices have increased from Rs700/tonne to Rs1,100/tonne in the last three-six months, said the management. Dalmia Bharat’s petcoke consumption rate was at $85/tonne for the second quarter of fiscal year 2018 (FY18) as compared to spot prices of $105/tonne, and its petcoke mix stood at 76% at the end of September quarter.

Since the management foresees further escalation, it kept a higher stock inventory of slag and petcoke, which resulted in increased working capital of Rs250 crore during the quarter.

As for demand, Dalmia Bharat foresees cement demand in key markets of Andhra Pradesh and Telangana growing 15-18% in FY18. Also, the sand mining problem in Tamil Nadu would get resolved soon, aiding demand recovery. In Karnataka and Maharashtra, the company is expecting demand growth of around 6% and in the north-east region nearly 3-4%.

Improvement in demand will be on the back of government schemes like low-cost housing, rural roads, irrigation projects and the recently announced Bharat Mala project, said Dalmia Bharat.

The management also expects cement prices to improve from November until June next year.

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