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Cement companies to witness lowest operating margins in last seven years in FY2023: ICRA

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World Cement,

ICRA in its recent report has analysed the demand-supply scenario and the input costs pressure on operating margins in FY2023 for cement companies.

  • Cement volumes are expected to grow by 7 – 8% in FY2023 to around 388 million t.
  • Elevated input costs are likely to result in a decline in operating profit margins by 440 – 490 bps in FY2023.

The cement volumes are expected to grow by 7 – 8% in FY2023 to around 388 million t aided by demand from housing, both rural and urban, and the infrastructure sectors. 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 MSPs of such crops for the upcoming marketing season, would determine farm sentiments going forward. On the infrastructure segment, the significant increase by 24% in capital expenditure to INR7.5 trillion in FY2023 budget estimates over FY2022 revised estimates, led by INR1.8 trillion for roads and INR1.4 trillion for railways is expected to augur well for cement demand. On the urban housing, notwithstanding potential challenges due to increasing interest rates, the 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 is likely to support demand going forward.

Commenting on the operating margins for FY2023, Ms. Anupama Reddy, Vice President, Corporate Ratings, ICRA says, “In FY2023, operating income1 is expected to increase by around 11 – 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 – 4902 bps to ~15.9% – 16.4%, which are expected to be the lowest over the last seven years.”

Supported by strong demand prospects, the cement capacity additions are expected to increase to around 29 – 32 million tpy in FY2023 from around 25 million tpy in FY2022. The eastern region is expected to lead the expansion and may add around 16 – 17 million tpy followed by the Central region at around 6– 7 million tpy in FY2023. This lumpy capacity additions in the East are likely to result in some pricing pressures in the region. Also, despite an expected increase in volumes by 7 – 8%, the cement industry’s capacity utilisation is likely to remain moderate at around 68%, on an expanded base.

Commenting on the credit metrics of the cement companies in FY2023, Ms. Reddy, says, “While the capacity addition is likely to increase in FY2023, the debt reliance is likely to be rangebound owing to the healthy liquidity of the cement companies. Hence, the leverage (TD/OPBIDTA) at 1.3x and coverage, DSCR at 3.3x in FY2023 are expected to remain healthy.”

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