Care Ratings except cement companies profit to improve this fiscal despite increase in logistics cost and fresh capacity addition of 31 million tonnes per annum over next two fiscals.
The expectation of higher cement demand due to Government spending on infrastructure may provide the wherewithal to pass on the incremental cost, said a Care Ratings report on Monday.
The possibility of price war with the new capacity going stream is ruled out as the capital cost for putting the new capacity is much higher at Rs 650-700 crore per million tonne per annum again Rs 400 crore per mtpa in 2009.
The cement demand should grow at five per cent this fiscal to maintain the capacity utilisation at last fiscal level of 71 per cent. Given the expected improvement in demand, these capacities are likely to be absorbed and higher demand growth could improve the utilisation levels, said Care Ratings.
Northern-based cement companies are expected to benefit more in the long term due to high utilisation rates of about 80 per cent as compared with pan India average of 71 per cent and entry barriers in terms of lower limestone reserves as compared with southern India.
Though the average freight cost in this fiscal is expected to be higher than last year on account of increased in diesel and 6.5 per cent rise in rail freight rates, higher realisations are expected to not only negate the impact but also result in improved profitability margins, it said. However, Care expects a partial reversal in cement price hikes in the near term due to monsoon impact.
While the cement industry would continue to witness cyclical trends due to the inherent nature of the industry, the long-term outlook for the cement sector is expected to be stable, it said.