BUSINESS
The 4% hike in freight charges for cement, proposed by the Railways, is expected to result in a 1-2% hit in the operating margins of cement makers.
The 4% hike in freight charges for cement, proposed by the Railways, is expected to result in a 1-2% hit in the operating margins of cement makers. The blow comes just as the industry has had to roll back the price hike effected in the northern market due to lack of demand.
“The increase impacts us by Rs2 per bag. At present, the market is bad. Thus, we are absorbing the cost. May be after sometime we will be able to pass it on,” H M Bangur, managing director of Shree Cement, said.
The importance of railways for cement makers can be gauged from the fact that Holcim-controlled Ambuja Cements and ACC have a freight cost of Rs800 per tonne and Rs600 per tonne, respectively. ACC, for one, has a 60% freight dependence on road and the rest on railways.
Rupesh Sankhe, research analyst with Angel Broking said, “Regional players mostly depend on road than rail, but the industry average is Rs600 per tonne as freight cost, and Rs300 per tone would be by railway. Thus, an increase of 4% would mean a mere 50 paise per 50 kg bag and including raw material transportation like coal, it translates to Re1 per bag.”
“They cannot increase prices because capacity utilisation was around 65% in the north and 60% in the south in November. At this rate, they can’t go for a hike. Even in Mumbai, cement consumption has fallen in the last two months.”
Cement prices in the north are around Rs200 per bag.
In the south, the average cost is Rs200 per bag in Hyderabad and Rs230-240 per bag in Chennai.
In the east, where prices are usually firm, the average is Rs250-55 per bag.
Another analyst from a domestic brokerage said, “The impact of rise in freight costs would be only 1% on the operating margin for all the players and they had a better run than last three consecutive quarters, so it wouldn’t harm much.”
The Gujjar agitation in Rajasthan is also expected to impact sales in the northern market.
“The exact quantity cannot be determined right now, but there will be a drop in cement supply due to the transportation hurdles. Also, north-based players had to roll back prices, which they were looking at increasing, as the demand is quite low. Thus, the price increase on freight will have to be absorbed by the players, though it’s not too high,” said another analyst.
Bangur said, “Right now there is a lot of uncertainty due to the agitation as nobody knows which area will be affected. The price realisation in the northern belt at present is Rs 195-200 per 50 kg bag in the whole sale segment and Rs 200-210 per bag in the retail segment.”
Investopedia says
Operating margin is a measure of the proportion of a company’s revenue left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
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