Cement companies report highest ever OPBIDTA/MT in Q1 FY2022 despite cost side pressures: ICRA
Cement production in India fell by 12% quarter on quarter to 82 million MT in Q1FY2022, mainly to state-level lockdowns in response to the second wave of Covid-19, which impacted demand in April - May 2021. It was, however, 54 percent higher year over year due to a lower base in April 2020 as a result of the nationwide lockdown. Production in 4M FY2022 is 2% lower than pre-covid levels (4MFY2020). ICRA anticipates that total cement production in India would expand by approximately 12% in FY2022, owing to pent-up demand, rural housing demand, and a pickup in infrastructure activities.
Ms. Anupama Reddy, Assistant Vice President & Sector Head, Corporate Ratings, ICRA, comments on the cement businesses' Q1FY2022 performance, "Sales volumes of ICRA's sample decreased by 20% Q-o-Q due to the impact of the second wave of the Covid-19 epidemic, but increased by 44% Y-o-Y." Net sales realisations increased by 4% year on year and 5% quarter on quarter, owing to the price increases implemented by cement businesses in Q1 FY2022. These price increases are mostly the result of recent increases in input costs, most notably electricity and gasoline costs, as well as freight costs. While the industry faced cost challenges, businesses reported their highest-ever OPBIDTA/MT of Rs. 1372/MT in Q1 FY2022, exceeding the previous high of Rs. 1306/MT achieved in Q1 FY2021. This was primarily due to improved net sales realisations and cost-cutting initiatives implemented.”
To elaborate on the costs, key input costs such as raw materials, power & fuel, and freight/MT increased by 26%, 26%, and 9%, respectively, in Q1FY2022. The raw material costs grew as a result of increasing additive prices such as fly ash and inward freight costs as a result of rising diesel prices, while the power and fuel costs/MT increased as a result of increased coal and pet coke prices. In Q1 FY2022, coal prices grew by 154 percent year on year while pet coke prices increased by 98 percent year on year. The impact of rising fuel prices is mitigated somewhat by cement businesses' increasing use of renewable energy and increased efficiency.
“While OPBIDTA/MT exceeded prior peaks in Q1FY2022, increased input costs could put pressure on operating margins, which are expected to drop by 200 to 230 basis points in FY2022. The reliance on financing for new capacity increases in FY2022 is projected to be lower, owing to the cement companies' good cash generation and liquidity. Ms. Reddy stated that the debt coverage indicators are likely to remain solid in FY2022.