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| FY10 may be less gloomy for cement makers |
| Chandan Kishore Kant / Mumbai May 08, 2009, 00:54 IST |
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Prices may decline by only 5% against earlier projections of 10-15%.
The domestic cement industry may see a less gloomy scenario in FY10 than projected so far. Cement prices are likely to fall less. The building material is expected to see a price fall of only 5 per cent in the second half of the present financial year and not 10-15 per cent as projected earlier.
Thanks to the delay in upcoming capacities and more importantly a “disciplined supply” strategy which, industry analysts said, may be adopted by the players. Moreover, the surge in prices by Rs 12-15 a 50 kg bag in the last quarter of FY09, following the demand growth, has increased the base prices for the year. This, analysts said, will help the industry go for smaller price cuts.
In its report on the Indian cement industry, global financial services firm J P Morgan has increased its earnings estimates for FY09-11, driven by lower coal costs and lower price declines in FY10. “We now assume a 5 per cent decline (in prices) compared with the earlier estimates of 10 per cent,” added the report. At present, the average cement prices across the country is hovering around Rs 242 a bag.
Analysts at the domestic brokerage houses, Business Standard spoke to, maintained the same view, saying despite overcapacity, utilisation level will fall significantly. In 2009, capacity utilisation stood around 86 per cent, which they said, will further slip below 80 per cent and may touch a low of 76-78 per cent in FY10.
Amrit Lal Kapur, managing director, Ambuja Cements (promoted by Swiss cement giant, Holcim), said, “The report has rightly captured the domestic cement industry’s scenario. Lesser price declines is a possibility as we are positive on the cement demand growth.” He added that FY10 may see similar growth as was in FY09 at 8 per cent. At a time when, experts are maintaining a growth of around 6 per cent, such a positive outlook from the country’s third largest cement producer signals that industry may maintain its growth.
The report further said, “A much more consolidated industry, combined with lack of high financial leverage across among larger participants, removes the stress of ‘keeping the plants running’ scenario.”
Analysts pointed out that since major companies, like ACC — the largest cement producer, took the decision to shut down units when demand was not optimum. It had spoken of similar shut downs in future too, and it will not be a surprise to see other companies exercising this option as well.
J Dattagupta, head — commercial services, ACC, said, “It is difficult to predict how the demand scenario turns.” However, he further said, “Nobody wants to shut down the units and at the same time no body will like to sit on clinker pile up amid poor demand, especially when working capital increases and cash flow reduces.”
The present financial year is expected to see an addition of 30-35 million tonnes. And the fear of this massive upcoming capacity took its toll on the cement sector till October last before the demand surged and so did the prices. J P Morgan also has lowered the capacity addition target for FY09-11 by almost one-fifth from 90 million tonnes to 73 million tonnes.
“Fresh capacities fall gradually and most of them in the latter part of the year. However, that does not mean the entire capacity will be available in the market. I believe, from 40 million tonnes of new capacities, the actual supply will be around 20-25 million tonnes,” added Kapur.
In fact, looking at the month-on-month (m-o-m) despatches, analysts pointed out, “Despatches have decreased (m-o-m), but there have not been any price reductions by companies. This is a start of the controlling supply and maintaining prices.”
On the year-on-year (y-o-y) basis, cement despatches have gone up, but on the month-on-month (m-o-m) basis, there is an actual decline of 5-10 per cent in despatches. For instance, despatches of Aditya Birla group (UltraTech and Grasim Industries), ACC and Ambuja Cements, though improved 17 per cent, 4 per cent and 11 per cent (y-o-y), respectively in April. But, on a month-on-month basis, there has been a decline of 5 to 10 per cent in the companies’ despatches.
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