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South-Based Cement Players, Coal India Likely To Gain From Petcoke Ban

The operating income of north-based players will likely be hit by 10-12% as a result of the Supreme Court's ban.



Workers unload sacks of cement. (Photographer: Kuni Takahashi/Bloomberg)
Workers unload sacks of cement. (Photographer: Kuni Takahashi/Bloomberg)

South India-based cement companies may become unintended beneficiaries of a Supreme Court order banning the use of petcoke by industries with effect from Nov. 1 in Haryana, Rajasthan and Uttar Pradesh.

Firms such as Dalmia Bharat Ltd., Orient Cement Ltd., and India Cement Ltd. will benefit if petcoke prices fall in the absence of demand from north-based companies at least in the short-term, according to a Kotak Securities report. India’s biggest coal producer Coal India Ltd., too, would benefit from increased demand for e-auction coal coupled with better price realisations, the brokerage added.

The Supreme Court’s ban on the use of petcoke and furnace oil in these three states in view of the adverse levels of pollution in Delhi and the National Capital Region is expected hit not just north-based firms but also northern operations of pan-India companies like Ultratech Cement Ltd., ACC Ltd., Ambuja Cements Ltd., the report said.

The operating income of north-based players will likely be hit by 10-12 percent, while the impact on earnings of pan-India players is expected to be more muted, the report added.

Power and fuel cost account for 25 percent of the total production cost of cement companies, according to the Kotak Securities report. Ahead of the apex court’s order, Murtuza Arsiwala of Kotak Securities had told BloombergQuint in an interview that power and fuel costs may rise 10-15 percent if the petcoke ban is implemented in Haryana, Rajasthan and Uttar Pradesh.

The apex court in a hearing last week had also asked all states and Union Territories to consider imposing the ban on petcoke and furnace oil. If extended to other states, the usage restriction may bring about incremental fuel sourcing issues for the sector.

However, IDFC Securities says that the petcoke ban would result in companies shifting to imported coal, and would increase power and fuel costs for the plants in these states by 25-30 percent, respectively.

Sanghi Industries is another unintended beneficiary as the company uses an alternative fuel lignite as its primary raw material and will thus remain unaffected by the petcoke ban.

IDFC Securities has assessed the impact of this development on the following cement companies under its coverage:

Shree Cement

  • 77 percent of the capacity will be impacted.
  • Power and fuel costs to rise nearly 20 percent or nearly Rs120/tonne in second half of FY18 over H1.
  • To result in a 7 percent impact on FY18 earnings.

Ultratech Cement

  • 19 percent of its capacity in impacted areas.
  • Share of petcoke in newly acquired Jai Prakash Associates assets impacted areas to be low.
  • P&F costs to increase by 4.5 percent or by Rs35/tonne in H2FY18E.
  • Likely impact on FY18E earnings if not passed on would be 3 percent.

ACC And Ambuja Cement

  • Has only 12-14 percent of capacity in impacted areas and also lower petcoke usage.
  • Power and fuel costs are likely to see an increase of 2-3 percent.
  • Impact on CY17 estimated earnings would be 1 percent each.