CEMENT production to up in FY 2022

ICRA Ratings expects the all-India cement production to report an increase by around 12% in FY2022, supported by the low base effect of previous year, continued strong rural housing demand and the sharp pickup in infrastructure activity from mid-December. This is despite some demand moderation witnessed in November 2021 due to erratic monsoons. In terms of recent trends, the all-India cement production reported an increase by 22% Y-o-Y in Q2 FY2022 and by 10% compared to Q2FY2020 (pre-Covid) supported by the strong demand from housing segment and pick up in infrastructure activities. For 7M FY2022, the production is higher by 5% compared to pre-Covid levels (7MFY2020).  Cement companies however, have been impacted by rising input costs which is likely to have an adverse bearing on the margins.

Giving more insights on the Q2 FY2022 performance of the cement companies, Anupama Reddy, Assistant Vice President & Sector Head, Corporate Ratings, ICRA, says, “The sales volumes of ICRA's sample were higher by 7% Y-o-Y at 62 million MT in Q2 FY2022 and by 22% Y-o-Y at 124 million MT in H1 FY2022. Given the increase in the input costs such as coal, petcoke and diesel, the cement companies have undertaken prices hikes and the net sales realisations witnessed an increase of 5% Y-o-Y in H1FY2022. Despite the increase in the net sales realisations and higher sales volumes resulting in better absorption of fixed costs, the OPBIDTA/MT declined by 12% Y-o-Y to Rs. 1137/MT in Q2 FY2022 and by 3% Y-o-Y to Rs. 1257/MT in H 1FY2022 due to an increase in the input costs, after reporting highest ever OPBIDTA/MT of Rs. 1378/MT in Q1 FY2022.”

Elaborating on the costs, the key input costs such as raw material/MT, power & fuel/MT and freight/MT witnessed an increase in H1 FY2022 by 16%, 26% and 7% respectively on Y-o-Y basis. The raw material costs increased due to higher additive prices such as slag, gypsum and inward freight costs due to an increase in diesel prices. The increase in the power and fuel cost/MT was due to the rise in coal and pet coke prices. The coal prices increased by 103% Y-o-Y and the pet coke prices by 81% Y-o-Y in H1 FY2022. The impact of the elevated fuel prices is moderated to an extent with the improving share of green power and efficiencies by cement companies.

“Despite some easing in the cost side pressures, the input costs are likely to remain elevated in the near term, and are expected to exert pressure on operating margins, which are likely to decline by 200 to 230 bps in FY2022. While the capacity additions are expected to increase in FY2022 when compared to previous year, the reliance on debt is likely to be lower owing to the healthy cash generation and strong liquidity of the cement companies. The debt coverage metrics are expected to remain strong in FY2022,” Reddy added.

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