The net profit of 10 major listed cement companies rose by 29.6 per cent on an average in FY21 amid a step up in infrastructure and construction activities in the country, an analysis by Acuité Ratings has said.
While the disruption caused by the Covid pandemic led to operational and demand challenges in the first half of FY21, the recovery in the second half drove a strong improvement in the cement sector profitability for the whole year, it said.
The cement volume growth has been disrupted in the April-June quarter of FY22 after the second wave of COVID-19, but the sector is expected to witness a recovery due to the government's thrust on infrastructure activities and housing construction, it added.
The second wave of Covid expectedly, has disrupted the cement volume growth in Q1FY22. Acuite estimates pan India cement volumes to grow at a CAGR of 10-11% during FY22 to FY23. The key driver of cement demand over the medium term is clearly, the focus on infrastructure and housing sector, it said.
An analysis undertaken by Acuité Ratings for the 10 major listed cement companies highlights that the net profits surged by 29.6% on an average although aggregate revenues grew modestly by 3.8%. Cost rationalisation and low cost inventory played a key role in the expansion of EBITDA margins, which went up 349 basis points to 24.3% in FY21.
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Price hikes undertaken by cement players in the later part of the fiscal, further supported the profitability improvement.
“Our study shows that the volume growth of the top ten listed cement players at 2.6% in FY21 is divergent from the overall 13.1% volume decline in the sector. This clearly highlights the ongoing consolidation and the strengthening market position of the larger companies,” says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.
Although the cement sector saw severe headwinds in demand in the early half of last year, it did benefit from the lower prices of key operating costs i.e. petroleum coke and diesel. These inputs represent power, fuel and freight costs, which account for 25%/30% of the total operating costs of the sector.
The cost structure, however, was challenged in H2FY21, when prices of petroleum coke rose by 29% and diesel prices by 15% over H1FY21. Nevertheless, availability of low-cost inventory and change in fuel mix enabled cement players to report stronger EBITDA margin.
Better operating efficiencies have also played a key role in supporting the improving operating margins in FY21. Several players lowered the consumption of petroleum coke by increasing the use of imported coal; while coal prices also increased, it has been available at a relatively cheaper rate. The increasing use of waste heat recovery systems has also started to contribute to better efficiencies, it said.
The power and fuel and freight cost of the major cement players, on an aggregate basis, declined by 18.0% and 10.6%, respectively, in FY21 over FY20, it said.
Apart from variable cost management, cement companies also managed to lower some of their fixed cost component like employee cost and interest expenses. Despite the revenue growth albeit modest in the top ten listed cement companies, their aggregate interest expenses dropped significantly by 22.4%YoY in FY21, reflecting the impact of both better working capital management as well as slightly lower interest rates, it said.