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Cement volumes to rebound to 10-yr high in 2022 as infra, housing demand pick up

An analysis of 15 cement companies within Crisil’s ratings universe, accounting for three-fourths of total sales in India, showed that credit ratings outlook for the sector is stable next fiscal. (Bloomberg)Premium
An analysis of 15 cement companies within Crisil’s ratings universe, accounting for three-fourths of total sales in India, showed that credit ratings outlook for the sector is stable next fiscal. (Bloomberg)

  • The cement industry's volume growth will witness a rebound, but higher cost of sales would weigh on cement profitability next fiscal.
  • Freight, power and fuel constitute almost 55% of the total cost of sales of cement

MUMBAI: Cement manufacturers are expected to hit decadal-high volumes in FY22, touching growth rates of 13% backed by expected revival in demand from the infrastructure and urban housing sectors, and a generous low-base effect. The increase in volumes will balance out the impact of rising energy costs, a report by credit ratings agency Crisil has said.

An analysis of 15 cement companies within Crisil’s ratings universe, accounting for three-fourths of total sales in India, showed that credit ratings outlook for the sector is stable next fiscal.

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“Higher spends on infrastructure development would be in line with the 26% increase in budgetary allocation for infrastructure in the Union Budget 2021-22. That, coupled with pent-up demand in urban housing, will drive volume growth," Nitesh Jain, director, Crisil Ratings, said in a note. “Demand from hinterland should sustain on the back of higher rural incomes."

While volume growth will rebound, higher cost of sales would weigh on cement profitability next fiscal. Rising prices of diesel, petcoke or coal, and polypropylene bags may push up cost by 150-200 per tonne. Freight, power and fuel constitute almost 55% of the total cost of sales of cement.

Increasing share of infrastructure and urban housing means a higher proportion of sales will be from the cost-conscious non-trade channels. That would translate to marginally lower net realisation for cement companies, according to the note.

“Operating profits could moderate by 200-250 per tonne next fiscal due to higher cost and lower net realisation, after touching a 7-year high of over 1,200 per tonne this fiscal," Isha Chaudhary, director, Crisil Research, said. “However, cash accruals won’t be affected as higher volumes will offset the impact of lower profit margins."

Capital expenditure by cement firms slowed in FY21 as firms chose to conserve cash amid demand disruption. Besides, ample liquidity and strong balance sheets have cushioned the impact of the pandemic on the credit profiles of cement companies.

However, the demand rebound in FY22 should spur expansion plans and the capex run rate could return to the 12,000-14,000 crore annually.

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