Freight hike seen denting margins 1-2%

Freight hike seen denting margins 1-2%
Published: 03 January 2011

The 4% hike in freight charges for cement, proposed by the Indian Railways, is expected to result in a 1-2% hit in the operating margins of cement makers. The blow comes just as the industry has had to roll back the price-hike in the northern Indian market due to lack of demand.

“The increase impacts us by Rs2 per bag. At present, the market is bad. Thus, we are absorbing the cost. May be after sometime we will be able to pass it on,” H M Bangur, managing director of Shree Cement, said.

The importance of railways for cement makers can be gauged from the fact that Holcim-controlled Ambuja Cements and ACC have a freight cost of Rs800 per tonne and Rs600 per tonne, respectively. ACC, for one, has a 60% freight dependence on road and the rest on railways.

Rupesh Sankhe, research analyst with Angel Broking said, “Regional players mostly depend on road than rail, but the industry average is Rs600 per tonne as freight cost, and Rs300 per tone would be by railway. Thus, an increase of 4% would mean a mere 50 paise per 50 kg bag and including raw material transportation like coal, it translates to Re1 per bag.”

“They cannot increase prices because capacity utilisation was around 65% in the north and 60% in the south in November. At this rate, they can’t go for a hike. Even in Mumbai, cement consumption has fallen in the last two months.”