Infra firms cheer as steel, cement prices drop

Expect boost in margins as the Two are important raw materials for the industry.

Infrastructure companies could well see an upside to their margins after the reduction in prices of steel and cement. Last week, steel manufacturers cut the price of steel by Rs 400-600 a tonne to about Rs 28,000 and cement makers have reduced the cost of bulk cement by Rs 4-5 per 50-kg bag to Rs 225-245. The moves follow the reduction in the central excise duty from 10% to 8% on February 24.

Construction companies say the price cuts could impact their margins positively as steel and cement are two very important raw materials for them. S Ramnath, senior vice-president of Chennai-based Shriram EPC, said there would be a definite reduction in cost of operations. “Companies signing new contracts with steel and cement manufacturers will benefit from the cut,” he added.

Ramnath said construction firms don’t generally stock raw material when prices are volatile. Usually, contractors buy raw material on a project-to-project basis.

For example, if a contractor takes up a three-year project, it signs a purchase agreement with cement and steel companies for about three months, so it can take advantage of any fall in prices after the three-month period. Similarly, if the prices go up, the contractor takes a hit.

Brijesh Koshal, head of investment banking at Daiwa Securities SMBC, said fixed-price contracts are the ones that would reap the benefits of the price cuts. “Most construction companies have only 20-25% of the order book in fixed-price contracts. To that extent, they will benefit,” he added. A fixed-price contract is one where the contractor bears the rise or fall in interest and raw material costs. A variable-price contract, on the other hand, has a contractor passing on any rise or fall in costs to clients.

Tapash Majumdar, chief financial officer of New Delhi-based C&C Construction, concurred. “Contractors faced losses when a few months ago, material and interest costs shot up. Now, they can make up for it.” Less than 10% of C&C’s Rs 3,000 crore order book is made up of fixed-price contracts.

Some believe it is not just fixed-price projects that would benefit. Praveen Sood, CFO, Hindustan Construction Company, said in some cases even variable-price contracts could be beneficiaries. “The pass-through clause in most variable-price contracts is linked to the wholesale price index (WPI) and since the price cut will take some time to be factored in WPI, even variable-price projects can gain from the cut for some time,” he said. Sood added that the price reduction could positively affect HCC’s earnings before interest, tax, depreciation and amortisation (Ebitda) by 0.25-0.5%.G Seetharaman. Mumbai

Infrastructure companies could well see an upside to their margins after the reduction in prices of steel and cement. Last week, steel manufacturers cut the price of steel by Rs 400-600 a tonne to about Rs 28,000 and cement makers have reduced the cost of bulk cement by Rs 4-5 per 50-kg bag to Rs 225-245. The moves follow the reduction in the central excise duty from 10% to 8% on February 24.

Construction companies say the price cuts could impact their margins positively as steel and cement are two very important raw materials for them. S Ramnath, senior vice-president of Chennai-based Shriram EPC, said there would be a definite reduction in cost of operations. “Companies signing new contracts with steel and cement manufacturers will benefit from the cut,” he added.
Ramnath said construction firms don’t generally stock raw material when prices are volatile. Usually, contractors buy raw material on a project-to-project basis.

For example, if a contractor takes up a three-year project, it signs a purchase agreement with cement and steel companies for about three months, so it can take advantage of any fall in prices after the three-month period. Similarly, if the prices go up, the contractor takes a hit.

Brijesh Koshal, head of investment banking at Daiwa Securities SMBC, said fixed-price contracts are the ones that would reap the benefits of the price cuts. “Most construction companies have only 20-25% of the order book in fixed-price contracts. To that extent, they will benefit,” he added. A fixed-price contract is one where the contractor bears the rise or fall in interest and raw material costs. A variable-price contract, on the other hand, has a contractor passing on any rise or fall in costs to clients.

Tapash Majumdar, chief financial officer of New Delhi-based C&C Construction, concurred. “Contractors faced losses when a few months ago, material and interest costs shot up. Now, they can make up for it.” Less than 10% of C&C’s Rs 3,000 crore order book is made up of fixed-price contracts.

Some believe it is not just fixed-price projects that would benefit. Praveen Sood, CFO, Hindustan Construction Company, said in some cases even variable-price contracts could be beneficiaries. “The pass-through clause in most variable-price contracts is linked to the wholesale price index (WPI) and since the price cut will take some time to be factored in WPI, even variable-price projects can gain from the cut for some time,” he said. Sood added that the price reduction could positively affect HCC’s earnings before interest, tax, depreciation and amortisation (Ebitda) by 0.25-0.5%.