The recent steep hike in cement prices expected to boost operating profitability of cement manufacturers, according to a report.

After a protracted stall since the roll-out of Goods and Services Tax (GST), cement retail prices soared in February, with the hike at the pan-India level estimated at Rs 24-25 per bag (50 kg) in the last week of the month compared with the corresponding week of January, ratings agency CRISIL said in its 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. 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, price cuts on these massive hikes would still ensure reasonable price growth of 3-5 per cent through fiscal 2020,” CRISIL Research senior director Prasad Koparkar said.

The southern region saw the steepest hikes, at Rs 52 per bag in Bengaluru, Rs 62 per bag in Chennai, and Rs 77 per bag in Hyderabad, Crisil observed, while hikes in other regions were less sharp, at Rs 26 per bag in the west (led by robust hike in Pune), Rs 12 per bag in the east, Rs 7 per bag in the central region, and Rs 4 per bag in the north.

It noted that even in the current fiscal, cement prices had seen a sedate run, declining 2.5 per cent over April and January despite healthy demand growth of 12.5-13 per cent in the nine months period.

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, it added.

In FY20, it expects incremental demand to outpace incremental supply by 5-5.5 MT, aiding modest price hikes.

It expects 22-24 MT of gross capacity additions next fiscal, with almost 65-70 per cent of these commissioning in highly competitive markets of the south and the east.

“Margins of cement players have been in the contraction phase for two years, and are estimated to shrink 150-200 bps in the current fiscal, at 16-16.5 percent. With modest realisations growth and cost deflation, we expect the trend to reverse next fiscal, with the industry seeing healthy expansion of 150-250 basis points,” CRISIL Research director Rahul Prithiani said.

However, the election outcome and its impact on demand growth would be key monitorables for sustenance of prices and thereby profitability, Prithiani added.