Why the worst is behind the cement sector

The three months ended September 30, 2022, have been the worst in the past several quarters for top listed cement makers in the country due to significant margin compression as costs have escalated.

While profitability is likely to remain subdued until next month, certain green shoots in the form of growth in volumes, increase in net selling price, robust growth in credit deployment towards infrastructure & housing projects and easing of inflationary pressure are likely on account of the plateauing of cost and ability to pass on the incremental cost to customers.

This will help the sector to turnaround from the coming quarter, according to Fitch-affiliated rating agency Ind-Ratings (Ind-Ra).

Cost escalation

While most cost elements have seen a rise in the post pandemic era on account of the inflationary pressures, the steep rise in power and fuel cost post war has led to companies reporting a sharp erosion in the operating EBITDA per tonne. The power and fuel cost per tonne for the top 20 listed companies increased 56% on-year and 6.5% sequentially to Rs 1,786 last quarter from Rs 919 in the quarter ended September 2020.

As a result, the pace of cost escalation has surpassed the increase in net sales realisation. The prices of non-coking coal and imported pet coke, which saw a decline and relatively less volatility during the pre-pandemic period, has shot up 2.38x and 2.16x, respectively last quarter compared to the quarter ended September 30, 2019.

The steep price hike is the result of the ongoing war between Russia and Ukraine which has led to an energy crisis in Europe, leading to a more-than-usual demand for coal. The rise in petroleum coke and diesel prices was in line with the price increase of crude and other crude derivatives during the same period.

Power and fuel and freight forwarding cost which contributed a little over half to the total cost during Q2 FY20 are now contributing close to two-thirds of total. The cement sector has been able to maintain the volume growth, however the growth in total cost per tonne has been at a much faster pace than the growth in net selling price since the start of the Russia-Ukraine war, leading to a steep erosion in EBITDA per tonne.