India's Cement Sector Faces Profitability Squeeze Amid Rising Energy Costs

Cement manufacturers in India are set to experience a significant decline in profitability this financial year due to rising energy costs. Crisil Intelligence reports that elevated fuel and power prices, driven by geopolitical tensions in West Asia, will compress operating margins from 16-18%, challenging the industry's profitability.

Cement manufacturers in India are bracing for a sharp decline in profitability for the ongoing financial year as surging energy costs threaten to erode their margins. Crisil Intelligence has warned that operating margins could shrink by 150-200 basis points year-over-year, settling at 16-18% this fiscal period.

The profitability squeeze stems from heightened energy prices, primarily due to geopolitical unrest in West Asia. This has spiked power and fuel costs, which constitute 26-28% of total production costs, with predicted increases of 10-12% from last year. The recent dramatic rise in crude oil prices, particularly Brent crude, reaching an average of USD 82-87 per barrel, underscores this challenge.

The situation worsens with a 25% surge in industrial diesel prices in March, further inflating logistics and raw material procurement expenses. Crisil Intelligence's Sehul Bhatt notes that these geopolitical disruptions will exacerbate cost pressures throughout the first half of the fiscal year, forecasting a 4-6% rise in total costs.

In response, cement companies are anticipated to hike prices by 1-3% annually, pushing average realizations to Rs 355-360 per bag. However, intensified competition and new capacity additions are expected to limit more significant price increases. Despite pressure, cement demand is projected to remain stable, growing by 6.5-7.5% this year, driven by infrastructure projects and the industrial sector.

Kinjal Shah of Crisil Intelligence points out that while modest price hikes and stable demand will bolster revenues, these will offer only partial relief against escalated costs. Premiumisation and higher pre-tax prices may aid revenue gains, though they won't fully counterbalance rising expenses.

Key risks for the sector include potential escalations in the West Asia conflict, the rate of infrastructure development, labor availability, and monsoon season patterns, as noted in the Crisil report. (ANI)

(With inputs from agencies.)