Apprehensive of any further intervention by the government, the Indian cement sector is taking cost-efficient measures to ensure better profit margins in the coming quarters.
Given the fact that any further steep rise in cement prices was unlikely in the near future, experts said that maintaining margins could turn out to be a difficult task.
Industry analysts believe that there would be a marginal increase in profit margins, though they warned that the coming quarters may not be that profitable as they had been last year.
According to J Radhkrishnan, cement analyst with India Infoline, “Cement prices are the most important factor in ascertaining realisation.”
Manoj Guar, president of the Cement Manufacturers Association (CMA) and executive chairman of Jaypee group, said, “For maintaining profitability, we are taking measures to ensure better cost efficiency. We have now 100 per cent captive power which reduces our costs. Rationalisation of logistics is being done, and I foresee an industry growth of 10 per cent on a year-on-year basis.”
Analysts point out that power and logistics are the important factors that decide profitability in the cement industry. Cost cuts on these fronts could help cement makers stay afloat and increase margins, they said.
“Power constitutes a significant portion of the overall cost of cement production. Captive power provides an alternative to reduce this cost component reflected in the increasing proportion of cement being produced from this source,” said Rakesh Valecha, director-corporate ratings, Fitch Ratings.
On an average, states charge Rs 4-5 per unit, where as, captive power costs between Rs 1.50 to Rs 2.50 per unit, thereby bringing a straight benefit of Rs 2.50 to Rs 3 per unit.
Depending on the process (dry and wet), production of one tonne of cement requires 110 to 125 units. This means, if power is sourced from a captive plant, manufacturing one tonne of cement will bring the power cost down by half, from Rs 540 per tonne to Rs 270 per tonne.
Valecha added that the rationalisation in logistics could come from increased usage of rail and sea routes. “Grinding clinker closer to the markets also provides an alternative in reducing transportation costs,” he said.
Last year’s strictures from the Supreme Court, permitting trucks to carry loads of up to only 9 tonnes, caused a hue and cry among the cement players as it led to an increase in road transport costs. Currently, roads account for 60-65 per cent of the total transport requirements.