Cement Companies To Register Lowest Operating Margins In Last 7 Years: ICRA

Cement companies are expected to register a 7% to 8% rise in their volumes in FY23 on strong demand, but operating profit margin may decline due to elevated input costs, rating agency ICRA said on Monday.

"The operating margins will be the lowest in the last seven years for the cement industry," the agency said in a report.

In FY23, the volume for the cement industry is expected to grow by 7% to 8% to around 388 million metric tonne, aided by demand from housing, both rural and urban, and the infrastructure sector.

"The demand for rural housing was supported by a robust rabi harvest and better crop realisation. The progress of Kharif sowing amidst a modest hike in Minimum Support Prices of such crops for the upcoming marketing season would determine farm sentiments going forward," it said.

In the urban housing segment, factors like growth in employee headcounts and salaries for many IT/ITES companies and demand for better and larger homes on account of the shift to the hybrid working model in customer segments working in IT/ITES, BFSI and related sectors are likely to support the demand going forward.

"Despite this expected volume increase, the industry’s capacity utilisation is likely to remain moderate at around 68% on an expanded base," the agency said.

ICRA's latest report has analysed the demand-supply scenario and input costs pressure on operating margins in FY23 for cement companies.

Anupama Reddy, vice president, ICRA said, "In FY23, operating income is expected to increase by around 11 to 13%, 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 bps to 15.9-16.4%, which are expected to be the lowest over the last seven years," she added.

Moreover, to meet the demand, the cement capacity additions are expected to increase to around 29-32 million metric tonne per annum in FY23 from around 25 million metric tonne per annum in FY22.

"The eastern region is expected to lead the expansion and may add around 16-17 MTPA followed by the Central region at around 6-7 MTPA in FY23. This lumpy capacity addition in the east is likely to result in some pricing pressures in the region," said ICRA.