“Cement Sector - Battling the cost wave”

The macros of the cement industry remain positive in the long term driven by revival in demand from the urban housing sectors, upcoming infrastructure projects as well as generous rural demand, though presently the sector is riddled with the cost-side issues. For the month ending September 2021 key cost constituents which are pet coke, international coal and diesel are up 20%,111%, 21% respectively from March 2021 levels. Combined impact of higher input costs on production cost of cement is expected to be around Rs.275 – 290 per tonne. While there is heightened focus on efficiency measures, we believe it would still be insufficient to fully offset the higher energy and freight costs. The elevated cost inflation coinciding with seasonally weak quarter would pinch margins of the cement players in Q2FY22. With the seasonal demand picking up in October 2021, cement companies have hiked prices across regions in the range of Rs.10-Rs.15 per bag to counter the adverse impact of elevated costs. With cost inflation having firmed up unabated and impacted all the players, it is unlikely that the entire increase can be passed on. The companies are expected to witness decline in PBILDT levels to the extent of Rs 100 - 150 per tonne (200 – 250 bps margin impact) for remaining quarters if the costs remain at elevated levels. As costs head northwards, the higher input costs and freight costs are likely to dent the margins of cement players in FY22 but healthy realisations on the back of strong demand are likely to limit margin contraction.Click here to read the full report...