UltraTech Signals Industry-Wide Price Hikes As Cost Pressure Builds Up

Cement makers join the list of manufacturers that have signaled higher prices as input costs surge.Power costs rose as coal turned costlier because of a crunch in the first quarter. Cement makers offset the impact to an extent by cutting costs and switching to alternative fuels. But that may not work in the coming quarters.India has seen a sudden shortage of coal, prompting the government to prioritise allotment to the power sector. Prices of imported coal are also rising as a global energy crisis has caused the demand to spike. And that mirrors input cost inflation across sectors, with everything from chips to gas and oil in short supply as the global economy gains momentum.Costlier power weighed on the margins of UltraTech Cement Ltd., ACC Ltd., and HeidelbergCement India Ltd. in the quarter ended September. CLSA, in a note after UltraTech’s earnings, said it expects fuel prices to trade at elevated levels due to a surge in demand and supply-chain issues.Management commentary also indicates more pain ahead, especially in the last quarter of the ongoing fiscal and the first three months of the next financial year. Estimating that demand will sustain, cement makers plan to increase prices.UltraTech Cement, India’s largest cement maker, has increased prices by Rs 10-15 a bag (3-7%) on an average across India. That’s not enough to offset the higher cost of production, Atul Daga, chief financial officer at UltraTech, said in the Q2 earnings call.The company said the industry will have to hike prices by 10% to reclaim the margins seen in April-June of this year..Power, Fuel Expenses JumpPower and fuel expenses rose sequentially and over a year earlier for UltraTech and Heidelberg. ACC managed to keep the expense flat sequentially.According to a report from Macquarie Research, domestic coal accounted for 50% of ACC’s requirement versus 20% for peers. The brokerage is building in at least Rs 150 per tonne increase in energy cost for the quarter ended Dec. 31, despite the expectations that ACC will shift to imported coal if the prices of the contracted supply is higher than in the spot market.Meanwhile, UltraTech Cement said it would have to shift to petroleum coke as a source of alternative fuel, as the company expects the situation to remain tough for the coal sector..Coal has surged threefold while petroleum coke prices have doubled sequentially in the quarter ended September.Overall Costs RiseFuel costs is not the only contributor to the squeeze on margins. Most of the companies reported an increase in packaging, fuel and logistics costs as well.Diesel moved from Rs 80 a litre to close to Rs 100 a litre during the quarter. One-time bonuses and salary hike for employees also contributed to increasing the cost per tonne.Price hikes are the only way out as improvement in efficiency is not enough to protect margins, said Daga.. Here’s what brokerages had to say about the cost inflation:JefferiesThe impact of higher energy prices is only likely to increase in the upcoming quarters.Citing Daga’s remarks in the conference call, it said that though fuel security is not a concern, the third quarter may see a Rs 200 per tonne impact and further pressures in the fourth quarter.Efforts are underway to pass on the impact.CLSAThe brokerage expects fuel and power costs to escalate in the quarter ending December.On ACC:Full cost inflation results (especially power) to reflect in the ongoing quarter and next year (ACC follows a calendar year for its financial reporting).News flow on capacity addition key for re-rating.On UltraTech:Cost pressure to accentuate in the second half of the fiscal but UltraTech can pass it on.The impact of higher fuel costs is likely to be Rs 200 a tonne on a sequential basis in Q3.If spot prices continue to rise, the additional impact could be Rs 500 a tonne.Goldman SachsCost pressures could keep profitability in check over the near-term as UltraTech continues to execute on costs and partially passes on commodity inflation.

UltraTech Signals Industry-Wide Price Hikes As Cost Pressure Builds Up

Cement makers to protect margins by increasing prices.

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