Cement firms cut production, increase prices to protect margins

The cement business for major players is expected to be profitable in the first quarter of this financial year, backed by an increase in cement prices and higher volume growth on a low base.

Capacity utilisation might drop by 1,100 basis points (bps) to 75 per cent, largely due to capacity addition over the year-ago level, cuts in production due to regional oversupplies and monsoon impact on cement dispatch in June.

Analysts expect the sector (only integrated cement players are considered for Q1 preview) to report an 18 per cent growth in sales and a significantly high growth of 20 per cent in profit. The operating margins are expected to be under pressure, down 25-50 bps, mostly due to increase in freight costs. The decline in prices of petroleum coke is expected to benefit those using this fuel.

Nevertheless, strong sales profit growth is expected from Madras Cement, Mangalam Cement, Shree Cement, JK Cement and JK Lakshmi Cement. ACC and UltraTech Cement might also do well, while Ambuja Cements might witness a good growth in profit. Birla Corporation and India Cements are likely to report weak performance.

The impact of higher realisations, thanks to double-digit rise in cement prices, would get diluted by a rise in rail freight rates and less capacity utilisation. However, the benefit of softening imported coal prices would reflect in the second quarter of the current financial year.

The industry is expected to report a nine per cent growth in volume in the first quarter due to lower base, delayed monsoon and strong demand in the northern region. However, on sequential basis, cement volumes are likely to be down by around eight per cent due to seasonal factors.

Pan India, demand is estimated to grow at eight per cent in FY13. The utilisation rate is estimated to remain at 77 per cent, as the capacity addition of 21 million tonnes (mt) is expected to negate the impact of incremental demand of 19 mt during the period, said a cement analyst at ICICI Securities.

Average cement prices improved around 12 per cent year-on-year due to a sharp increase in prices in the eastern and central regions. There was a modest two-five per cent quarter-on-quarter increase in cement prices in the northern, western and southern regions.

Last month, the Competition Commission of India (CCI) had imposed a penalty of Rs 6,300 crore on 11 companies for forming a cartel to raise cement prices.
 

However, the companies had raised prices by around Rs 10 per bag soon after.

The price rise was implemented in most parts of the country, according to a cement analyst at Sharekhan Research.