Analysts said prices of both imported and domestic pet-coke have fallen by more than 15% in the past few months (Graphic: Satish Kumar/Mint)
Analysts said prices of both imported and domestic pet-coke have fallen by more than 15% in the past few months (Graphic: Satish Kumar/Mint)

Despite dual cost savings, profitability concerns persist for cement makers

  • Cement demand is stagnant, prices are depressed, and Just saving costs is unlikely to turn around the sector’s fortunes
  • Of course, the quantum of savings would differ for each company, depending on the transportation mix

Cement companies are likely to reap double benefits on the cost savings front. First, the 15% busy season surcharge for transportation of cement via railways has been withdrawn during October-June. Second, the Indian Railways has done away with 5% freight charges on loading mini rakes.

“Considering the current base rate of 727/tonne per 500km and railway freight proportion of 30%, cement industry should essentially save over 600 crore in the second half of the fiscal year 2020," said Binod Modi, an analyst at Reliance Securities Ltd.

Of course, the quantum of savings would differ for each company, depending on the transportation mix. Among pan-India cement makers, ACC Ltd is likely to benefit the most, given its higher dependence on the railways. Analysts at Edelweiss Securities Ltd estimate 30/tonne cost savings for the sector.

Add to this the corporate tax cut. Most cement makers pay 30% tax and a reduction of around 8% would further boost savings. The announcements came at a time when the cost environment for cement companies was already benign. Prices of commodities driving the sector’s variable costs—power, fuel and freight—remain soft with declining petroleum coke and thermal coal, and flattish diesel prices.

Analysts said prices of both imported and domestic pet-coke have fallen by more than 15% in the past few months. Further, international thermal coal prices have come down by about 20% over the past five months.

In response to the tax cuts, analysts have upgraded their earnings per share (EPS) target for cement manufacturers (see chart).

However, demand recovery and improvement in prices remain key drivers for the sector. Currently, cement demand is stagnant and prices are depressed. In this scenario, only saving costs is unlikely to turn around the sector’s fortunes. What’s more, with large capacity additions, the industry’s utilization levels would remain below 70% at least in the near term.

“Cement companies in our coverage benefit from the tax cut but given the fragmental industry should see partial pass through of benefits. We see demand concerns persisting in the short term given high dependence on government expenditure. Also, we see the risk of higher capacity additions in FY2022-23E as companies would look to monetize on tax incentive on new manufacturing units," Kotak Institutional Equities Ltd said in a report on 23 September. The broker said it believes margins for the sector peaked in Q1, with demand unlikely to recover in the near term.

In short, fundamentals continue to remain weak. While tax cuts provide a near-term boost, sustainable margin improvement depends on how soon prices recover.

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