With the softening of cost-side pressures – predominantly power and fuel costs – the OPBIDTA/MT is expected to improve by 14-18% YoY to Rs. 900-950/MT. This should improve the EBITDA margin for the cement sector by 230-270 bps to 16.3-16.7% in FY2024.
However, this will remain below the margins reported during FY2017 – FY2022. Power and fuel costs, which were at a peak in H1 FY2023, eased in H2 FY2023 and are expected to further moderate in FY2024, improving the operating margins.
Steady demand from the housing and infrastructure sectors along with a pick-up in industrial capex is expected to support volume offtake. Nevertheless, the development of El Nino conditions could adversely impact the monsoons in 2023, impacting rural housing, which could pose some downside risks.
The cement companies witnessed a strong growth of 18% YoY in FY2023, driven by higher volume growth of 13% and a 5% increase in net sales realisations. However, the spike in input costs, majorly power and fuel, due to a significant increase in coal and petcoke prices impacted the operating margins, which contracted significantly by around 680 bps to 14.0% in FY2023. Consequently, there has been a moderation in the return on capital employed (RoCE) and increase in leverage metrics.
The credit profile of cement producers is expected to remain stable, driven by a healthy growth in operating income, expected improvement in operating margins and comfortable leverage metrics.
Although the debt dependence is expected to remain high to fund the ongoing capex plans, the leverage metrics of the cement companies, as measured by TD/OPBIDTA, are expected to remain comfortable at previous year’s levels of 1.4-1.5x in FY2024. Consequently, the coverage metrics are expected to remain healthy with DSCR at 1.8-1.9x, supported by improvement in OPBIDTA in FY2024.
