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Cement manufacturers in India are likely to witness a sharp decline in profitability in the current financial year as elevated energy costs weigh on margins, according to a report by Crisil Intelligence.
The report estimates that operating margins of cement companies will contract by 150-200 basis points (bps) year-on-year to 16-18 per cent this fiscal, reversing the 260-280 bps expansion seen in the previous year. The decline is primarily attributed to a surge in energy prices triggered by geopolitical tensions in West Asia, which have significantly increased power and fuel expenses, a key cost component accounting for 26-28 per cent of total costs. Crisil Intelligence noted that power and fuel costs are expected to rise 10-12 per cent on-year, driven by higher prices of crude oil, pet coke, and thermal coal. Brent crude prices surged sharply in recent months and are projected to remain elevated and volatile, averaging USD 82-87 per barrel this fiscal. Additionally, industrial diesel prices have risen by around 25 per cent in March, adding further pressure through higher logistics and raw material procurement costs. "Geopolitical disruptions will intensify cost pressures for cement makers in the first half of this fiscal. A surge in energy prices, along with moderate increases in raw material and freight costs, will push total costs up by 4-6 per cent," said Sehul Bhatt, Director, Crisil Intelligence. To offset rising costs, cement manufacturers are expected to increase prices by 1-3 per cent on-year, taking average realisations to around Rs 355-360 per bag. However, competitive intensity and capacity additions are likely to cap sharper price hikes. Despite the margin pressure, demand for cement is projected to remain steady, growing at 6.5-7.5 per cent this fiscal. Growth will be supported mainly by infrastructure activity and demand from industrial and commercial segments. "While price hikes and steady demand will support realisations, the increase is expected to be moderate at 2-4 per cent, offering only partial relief to profitability," said Kinjal Shah, Manager, Crisil Intelligence. The report also highlighted that premiumisation trends and higher ex-GST prices could aid realisation improvements, though not enough to fully offset rising costs. Key risks to the sector outlook include the trajectory of the West Asia conflict, pace of infrastructure construction, labour availability, and monsoon patterns, the report added. (ANI)
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