Real estate developers and infrastructure companies reeling under high debt loads will soon witness their construction costs escalating as cement companies are contemplating a price increase of Rs 8-10 per 50 kg bag as early as February, counting on a revival in demand and as a buffer against escalating input costs.
Vinod Juneja, Managing Director at Binani Group of Industries said demand has grown by around seven to eight per cent from a year ago in January.
A senior official from ACC, said demand has turned around across regions. “January-March is the peak season for cement companies and we are witnessing demand across regions including South India. In the North it has been a little subdued so far, due to a severe winter but is seen improving going forward,” said the ACC official. The President of Cement Stockists & Dealers Association on Bombay said cement companies are contemplating a price rise of Rs 8-10 per bag mainly in Western and Northern India.
High input costs of items such as coal and transportation have also led firms to push through price rises so as to protect margins. At present, a 50 kg bag of cement costs around Rs 260-280 across the country.
Vineeta Singhania, Managing Director of JK Lakshmi cement, said, “Demand in North India too has improved and is expected to revive fully in February. Due to a severe winter it was little subdued compared with other regions. Cement companies may look at increasing prices in February not only due to improved demand but also due to escalating coal and freight costs as it is eroding our margins.”
Ravi Sodah, an analyst at Elara Capital said in October December 2011 quarter, cement demand grew by around nine per cent. In contrast, for the nine-month period ending December 2011, demand for cement has grown by around five per cent.
Elections in five states are also driving cement demand as government spend increases pre-election.
“January-March is the peak season for cement demand and usually whatever cost pressures are there cement companies try to pass it to consumers. Further election in states like Uttar Pradesh, Gujarat, Punjab among other places is also driving demand for cement,” said Sodah.
While cement companies are trying to improve margins by passing on their rise in input costs, real estate developers and infrastructure companies are likely to feel the heat as their cost of construction will escalate. Given the weak demand, real estate companies may have to absorb the increase in input costs. In fact, the ratio of under-construction homes to sales in leading metros such as Mumbai has been hitting record highs.
Brotin Banerjee, Managing Director at Tata Housing said while the real estate market is slowing down, commodity prices are going up. “This a concern for all developers as inputs costs are going up which we are not able to pass on to consumers. Any per cent increase in input costs makes our lives difficult,” said Banerjee.
Jackbastian Nazareth, Chief Executive Officer at Purvankara Projects, said that any kind of increase in cement costs will definitely put pressure on construction costs. Developers, who have pre-sold their inventory are likely to be under pressure as there will be no scope for them to pass on the rise in input costs but for developers like us, who sell inventory in a controlled and periodic manner, it would be easier to pass it on to the consumers.” However, he admitted that given the present scenario in demand implementing price rises are difficult.
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