CRISIL expects cement profitability to dip 15% in FY23

Cement profitability to dip in FY23
Cement profitability to dip in FY23

by 5paisa Research Team Last Updated: Sep 27, 2022 - 02:22 pm 14.7k Views
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The news is not great for cement companies. For the full year FY23, the operating profits of cement manufacturers is likely to fall by around 15% to a level of Rs900-925 per tonne. This is based on a note by CRISIL on the outlook for cement industry in India. This comes on top of the 9% fall in cement operating profits in FY22, so the overall fall over the FY21 levels is likely to be close to 25% over a 2 year period. According to the CRISIL report, top line volume growth and realizations will be still robust, but may not be sufficient to offset the spike in the input costs during the fiscal year. That is likely to depress operating profits.


The outlook for the top line is quite encouraging. CRISIL expects the cement demand for FY23 to show robust growth along with better price realizations. Most of the cement demand is likely to come from the non-housing sector with the housing sector likely to feel the negative impact of higher interest rates caused by a hawkish tone of the RBI. CRISIL has based its findings on the analysis of around 22 cement companies that account for around 85% of the total market volumes in India. That is a fairly representative sample.


According to CRISIL, in FY23, the cement volume growth would be driven largely by the non-housing demand that is likely to show growth of 15% yoy. This would be largely driven by the infrastructure sector where the demand would be largely aided by the government spending on infrastructure. At the same time, the industrial demand would largely come from specific sub-segments like data centres and warehousing. However, the demand growth would be stymied by the housing demand growing at just about 5% in FY23. Overall cement demand growth of all segments combined would be in the range of 8% to 10%.


There is likely to be a regional disparity also in the cement demand, according to CRISIL. For instance, the bulk of the demand growth for cement would come from Eastern India and North East, where growth could touch 14%, but that would be more due to a lower base. On the other hand, the central and southern regions would see growth in demand for cement in the vicinity of 10% or around the industry average. The pressure would come from the more matured markets of North and West India where the demand for cement is likely to grow at mid to higher single digits. That will be the demand pressure point.


Let us come to the cost aspect in FY23. While the petrol and diesel prices have come down, they are still higher than in FY22 on an average. In terms of special input components, petcoke prices will still be  higher than the average of last year. Power and fuel (accounting for 30% of cement costs) would be higher due to the power shortfall in many regions. Since, freight would also be higher on a yoy basis, the overall cost of cement is likely to increase by around Rs300 per tonne. That would put pressure on the operating margins and bring down the operating profits to around Rs900 to Rs925 per tonne on an average all-India.


In the case of petcoke, much of the pressure may also come from the inventory effect. The higher cost inventory would be depleted only by end of 2022, so the impact of lower input prices would be limited. Cement prices may spike by just about 3-4% in the year and that would mean lesser margins for manufacturers. CRISIL has also given some good news. While the capex is likely to increase by 42% yoy to Rs27,000 crore in FY23, the impact on leverage would be limited as most of the expansion is funded by internal accruals. At the end of the day, cement demand and pricing would hold the key for the rest of FY23.


When it comes to cement pricing, we cannot ignore the impact of supply overhang. Over the next 5 years, Adani is likely to double capacity to 140 MTPA while Ultratech will increase from 120 MTPA to 200 MTPA. Other cement companies like Shree Cements, India Cements, Birla Cements and JK Cements also have aggressive expansion plans. That could be a major overhang on future prices.

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