Increased demand in infra sector will provide support: Cement companies sales may rise by 13%, can reach a decade high

The cement industry’s sales volume growth is expected to reach a decade high of 13% in the next financial year. In this, the expected recovery will be a major contributor to the demand for the infra sector and urban housing sector. Global rating agency CRISIL Ratings has given this estimate.

Credit outlook will remain stable, the margin will decrease

According to the rating agency, the increase in sales volume will cut the impact on cash accruals due to an increase in the cost of electricity and fuel. This will ensure stability in the credit outlook of the cement companies. According to CRISIL Ratings, “There will be a recovery in their sales volumes, but higher margins will reduce profit margins in the next financial year.”

Cost may increase by 150 to 200 rupees per ton

CRISIL Ratings says the cost of cement companies could increase by Rs 150 to Rs 200 per tonne due to costlier raw materials like diesel, petcoke or coal and polypropylene. Their share of transportation, electricity and fuel accounts for about 55% of the total cost.

According to the rating agency, “Increased demand for cement from the infra sector and urban housing will mean that they will get more attention from the non-trade channel with a lot of focus on the higher sales price.” This may result in lower cement prices.

Increased income in villages may keep demand strong

Regarding the report, CRISIL Ratings Director Nitesh Jain said that cement demand may remain strong due to increase in income in villages. Strong demand from rural areas has given a big boost to cement companies in FY 2020-21 affected by Covid-19.

Sales will increase due to suppressed demand for houses in cities

Jain said, “According to the 26% increase in the budget provision of the infra sector in 2021-22, the expenditure on infra development may be more. Cement sales will also increase due to the suppressed demand for houses in urban areas due to Covid-19.

Operating profit may decrease by Rs 200-250 per tonne

Isha Chaudhary, director of CRISIL Research, says that operating costs of cement companies may fall by Rs 200-250 per tonne due to increased costs and lower prices. But this will not have any effect on their cash actuaries, as higher sales volumes will compensate for lower profit margins.

Sales volume may decline by 2% this fiscal year

According to the rating agency report, the sales volume of the cement industry is expected to decline by two percent in FY 2021 due to Covid-19. The report also said that a 31% recovery in the June quarter volume could reduce sales by 1-2% for the entire financial year.

Low balance on credit profile due to strong balance sheet

According to the report, cement companies are saving cash by reducing capital investment due to declining demand. Due to adequate cash and strong balance sheet, Covid-19 has less impact on the credit profile of cement companies.

Recovery in demand will boost expansion plans

CRISIL writes in its report, “The decline in demand for urban housing and infra sector was offset by the increase in demand from rural areas.” A recovery in demand could boost cement companies’ expansion plans.

Timely release of funds for important infra projects

The report said that in order to increase the demand for cement, timely release of funds for important housing and infra projects announced in the budget is necessary. If there is an upsurge in the cases of Covid-19, the economic recovery will vanish.