The recent price increases by Indian cement companies will counter higher energy costs while the impact on profitability from a resurgence of coronavirus is likely to be limited, Fitch Ratings said on Tuesday.
The agency expected cement demand to be less affected by restrictions to curb the spread of Covid-19 this time around while larger cement companies' strong profitability in the financial year ended March 31 (FY21) should cushion their financial profiles against downside risks.
Key energy commodities including petroleum coke, imported coal and diesel which together account for more than 50 per cent of cement makers' costs rose sharply, particularly after 3Q FY21.
However, the impact on cement companies' costs was less apparent in 4Q FY21 as they switched to using lower priced imported coal and benefitted from lower-cost inventories and a lag in adjustments in freight costs.
"We expect the impact to be more visible in 1Q FY22 but the mid-single-digit price increases by cement companies after 3Q FY21 will help to cushion the overall impact on their per tonne profitability," said Fitch.
The fresh curbs to contain the resurgence of coronavirus after March are more localised. They are also less stringent than those last year when a nationwide lockdown caused cement production to fall by 38 per cent in 1Q FY21.
Unlike last year, manufacturing plants and construction sites can operate in most states and there is significantly less disruption to logistics services and labour availability.
Nonetheless, the localised curbs which are effective in majority of states can cause cement demand to drop by more than 20 per cent in 1Q FY22 from 4Q FY21.
However, Fitch expects the economic impact of latest restrictions to be less severe than those last year which should drive pent-up demand for cement after the curbs are eased.
"We believe this should support moderate recovery in cement demand in FY22 from FY21 levels unless stricter or wider restrictions are imposed. Recovery after 1H FY21 limited the full-year decline in cement production to 12 per cent," said Fitch.
"We expect industry prices to remain resilient as they did in FY21, consistent with the industry consolidation over the past few years."
Many large cement producers including UltraTech Cement, ACC Ltd and Ambuja Cements -- subsidiaries of LafargeHolcim Ltd -- reported improved profitability in FY21 despite the impact of Covid-19 pandemic in 1H FY21.
( With inputs from ANI )
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