Margins squeezed for Indian cement producers

India remains one the fastest-growing economies at 7.4 per cent GDP growth in 2022, according to the IMF. Cement demand has also risen and is forecast to rise by 7-8 per cent in the FY22-23 to around 388Mt, says ICRA Corporate Ratings. This would seem positive for investment in the Indian cement sector, but cement producers have been announcing tighter margins, and raw material and energy costs are expected to further impact margins going forward.

Reporting on operating margins for cement producers, Anupama Reddy, vice president of ICRA Corporate Ratings, said, “In the FY2023, operating income is expected to increase by around 11-13 per cent, majorly supported by volumetric growth as well as an expected increase in net sales realisation. However, the elevated input costs are likely to adversely impact the operating margins and decline by 440-490 basis points to ~15.9-16.4 per cent, which are expected to be the lowest over the last seven years.” 

At present all the demand signals for cement in India suggest an upward trend. Rural housing demand has been robust while the urban housing segment has been expanding following the growth in IT employee salaries, the shift to hybrid working and demand for larger homes. Meanwhile, infrastructure has seen a 24 per cent rise in capital expenditure to INR7.5trn (US$94.3bn) in the FY22-23 budget, led by INR1.8trn for roads and INR1.4trn for railways.

Rising fuel and power costs
Despite positive demand triggers, huge profits have not been forthcoming for cement producers. ACC Ltd’s subdued April-June 2022 quarter result was typical of many Indian cement producers. Rising fuel costs and related inflationary impacts reduced profits. “We were able to mitigate part of this impact through our efficiency project ‘Parvat’. The cost reduction journey will be further accelerated with the commissioning of waste heat recovery projects in Jamul, Kymore and Ametha plants taking the share of green power to 15 per cent,” said Sridhar Balakrishnan, managing director and CEO of ACC Ltd (Holcim Group). 

Power costs are just one of the inflationary pressures affecting margins. UltraTech Cement (Aditya Birla group) reported lower labour availability in May 2022. Ramco Cements pointed towards rising raw material costs, transport and handling charges as well as power and fuel cost rises as contributory factors to its 65 per cent hike in total expenses for the 1Q22. Ramco Cements said that power and fuel prices have increased by 138 per cent to INR5.244bn, which in turn has exacerbated logistics costs.

Utilisation rates
Strong cement demand has enabled some cement producers to see the value in keeping utilisation rates high, but others have had to cut back because of power costs. UltraTech has benefitted from some of the highest capacity utilisation rates of 83 per cent in the 1QFY22-23 compared to 73 per cent in the 1QFY21-22. The cement industry’s average capacity utilisation is only around 68 per cent, according to financial analysts at ICRA. 

Producer action to protect margins
Cement producers are finding different ways of mitigating costs and improving their profits. While most are already committed to efficiency gains and WHR projects to lower power costs, other trends are starting to filter through. Birla Corp stated that rising power, fuel and freight costs were the reasons its profitability was affected in the 1QFY22-23. In reaction to this Birla has stepped up its use of industrial waste for alternative fuel and raw materials across all its plants by 12 per cent of total fuel consumption.

Fellow competitor Ramco Cements has initiated its strategy of ‘premiumisation’, which has seen it focus on creating a premium for its cement products by directing customers to the right cement for the right application. Nuvoco Vistas Corp has similarly reported that its trade volumes for premium products improved by 34 per cent in the FY21-22.

Meanwhile, Grasim Industries (Aditya Birla group) has invested US$250m in a B2B e-commerce platform to prioritise its sales to micro-, small- and medium-sized enterprises in the building materials segment. 

Summary
India's cement producers are responding to the challenge of rising costs and working innovatively to maintain margins. Going forward, India’s cement producers are equally focussed on serving the growing cement demand across the country. This has given extra impetus to capex additions, which are set to increase by 29-32Mta in the FY22-23 from around 25Mta in the FY21-22. Eastern expansion is expected to add 16-17Mta while, the central region an extra 6-7Mta is planned in the FY22-23, reports ICRA Corporate Ratings. However, these capacity additions are expected to lead to price pressures that could also impact margins.

The future outlook may be further complicated by the actions of the Competition Commission of India, which is looking into antitrust violations in the sector. The industry is likely to have to brace itself for large fines if the commission concludes that anti-competitive practices have occurred in the market place before 2019.