Sharp rise in commodity prices to have adverse impact on construction industry's profitability: Icra

UltraTech Cement | The company has commenced mining of coal from its Bicharpur coal mines in Madhya Pradesh.

Sharp rise in commodity prices along with increased competition will have an adverse impact on the profitability of construction industry, domestic rating agency ICRA said on July 13.

The industry is battling with input cost pressure due to considerable rise in major commodity costs, particularly steel, bitumen and cement.

"A Sharp increase in commodity prices, along with increased competition, will have an adverse impact on industry profitability, with an anticipated decline in operating profitability by 100-200 basis points in the current fiscal," ICRA said in a statement. A sharp rise in commodity prices seen in FY22, if sustained, can reduce players’ profitability by 100-200 basis points in the current financial year.

Notwithstanding some moderation in steel prices in the past 6-8 weeks, the prices of steel were still higher by 40 per cent compared to the rates of March 2021, which will continue to remain a drag on profitability. Similarly, fuel prices and bitumen prices have also seen a sharp increase in the last one year. The commodity price increase has been much sharper than the overall inflation rate and hence inflation-linked price escalation clauses (in some contracts) will not be able to absorb the commodity price hikes.\

Similarly, fuel prices and bitumen prices have also seen a sharp increase in the last one year. It further said that it expects the construction industry in India to witness a healthy revenue growth in the medium term.