Excess cement capacity in 2009-10 will mean lower profitability for cement companies.

So far, the cement business has held up remarkably well and helped Grasim Industries post some good numbers in the March 2009 quarter. After all, it accounts for over 75 per cent of its consolidated revenues. Though its subsidiary, UltraTech Cement, reported 230 basis points dip in operating profit margin (OPM) to 29.2 per cent due to higher energy and input costs, on a consolidated basis, Grasim’s cement business’ OPM improved 80 basis points to 30.5 per cent. Better demand in key markets helped volumes rise 12 per cent and improved realisations to 6 per cent.

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Thus, it was because of the strong performance in cement that Grasim’s consolidated sales grew 5 per cent to Rs 5,020 crore and operating profit went up just 1 per cent to Rs 1,329 crore during the March quarter. Grasim also increased cement capacities by 19 per cent y-o-y to 41.6 million tonnes, which supported the additional volumes. However, the commissioning of new capacities meant higher interest expenses and depreciation charges in the quarter, which pulled down net profit by 5 per cent.

Total capacity will rise to 49 million tonnes by the end of the current financial. So, volume growth should be healthy. Likewise, its captive thermal power capacity more than doubled in 2008-09 and Grasim (including UltraTech) would now be able to meet 80 per cent of its power requirement through in-house generation. This should help contain cost and provide cushion at a time the domestic industry is expected to experience an over-supply situation in cement.

Notably, the outlook for VSF continues to remain subdued, though there may be a short-term improvement in realisations. Grasim is close to selling the sponge iron business for Rs 1,030 crore. At Rs 2,254, the stock trades at a PE of 9.5 times its estimated 2009-10 earnings and appears a tad expensive.

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