Ratings agency Crisil in its latest report has said that the recent steep hike in prices of cement is likely to help cement companies to increase profitability and margins even as costs are descending and demand growth ascending. It indicated that cement prices increased by Rs 24-25 per bag of 50 kg in February as compared to the previous month amid falling cost and rising demand growth. It added that the hike in the cement prices came after a ‘protracted stall’ following the rollout of the goods and services tax (GST).
According to the report, the price hikes, coupled with falling costs and rising demand growth, will enable 200-250 basis points on-year improvement in margins in the current quarter. It also said that the sustainability of these prices beyond the current quarter appears uncertain as demand momentum is seen coming off in the first half of next fiscal given the impending elections. However, it noted that price cuts on these massive hikes would still ensure reasonable price growth of 3-5 percent through fiscal 2020.
Ratings agency further said that even in the current fiscal, cement prices had seen a sedate run, declining 2.5 percent over April and January despite healthy demand growth of 12.5-13 percent in the nine months period. It added that a slew of capacity additions totalling 27 million tonnes (MT) between the March quarter last fiscal and the third quarter this fiscal, coupled with ramp-up of acquired assets kept price hikes away despite robust rise in volumes during this period. In FY20, it expects incremental demand to outpace incremental supply by 5-5.5 MT, aiding modest price hikes. It also expects 22-24 MT of gross capacity additions next fiscal, with almost 65-70 percent of these commissioning in highly competitive markets of the south and the east.
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