The increase in volume will offset the impact of higher electricity and fuel costs on cash flow adjustments and keep the credit outlook for cement manufacturers stable.
“Higher spending on infrastructure development would be in line with the 26% increase in the budget allocation for infrastructure in the 2021-2022 Union budget. This, coupled with pent-up demand for urban housing, will drive volume growth. Demand from the hinterland – let’s save it this fiscal year – is expected to be sustained through higher rural incomes, “said Nitesh Jain, director of CRISIL Ratings.
While volume growth will rebound, higher cost of sales will weigh on cement profitability in the next fiscal year.
Increase in diesel prices, petcoke or charcoal and polypropylene bags can drive up costs by 150 to 200 rupees per tonne. Freight, electricity and fuel account for nearly 55% of the total cost of cement sales.
“Operating profit could moderate by 200-250 rupees per tonne in next fiscal year due to higher cost and lower net realization, after hitting a 7-year high of over 1,200 rupees per tonne this fiscal year. However, cash flow adjustments will not be affected because higher Volumes will offset the impact of lower profit margins. The increase in accrued charges will keep the net debt / healthy EBITDA ratio at 1.4- 1.5 times the next fiscal year, despite an increase in capital spending (capex), ”said Isha Chaudhary, Director, CRISIL research.
The rapid recovery from a 31% contraction in the first quarter of this fiscal year is expected to limit the decline in volumes to just 1-2% for the full year. Growing rural demand has offset the decline in housing and infrastructure in urban areas. The rebound in demand is expected to boost expansion plans and the capex rate could revert to the annual rate of Rs 12,000-14,000 crore from the next fiscal year, the agency said.