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| Slowdown in earnings expected for cement firms |
| B G Shirsat / Mumbai Nov 11, 2009, 01:03 IST |
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The robust growth in net profit in the second quarter seems unlikely to be repeated soon for cement companies, as prices in the south and west have been falling since October, with the increase in supply outstripping demand.
According to a cement analyst at IIFL Research, price cuts have become a daily occurrence in the southern markets, but are stable in central region. In Gujarat, price declines have accelerated, as supplies originally intended for exports have been diverted to the domestic market due to poor demand from West Asia.
At present, cement is cheapest in Hyderabad, at Rs 123–145 per bag of 50 kg — down 18 per cent in the past two weeks and 45 per cent from the peak price reached in April. Cement prices in the south have dropped by Rs 15-30 a bag, due to sharp increase in supplies from small and medium cement. In Gujarat, price has declined by Rs 15-20 a bag as exports to West Asia have taken a hit. Increasing supplies from the south to Maharashtra have depressed prices by Rs 10-20 a bag. Prices have declined by Rs 10-15 per bag in the central region on increasing supplies.
J Radhakrishnan, cement analyst at IIFL, expects subdued third quarter performance from South-based companies, but says Northern and Eastern region companies are likely to do well. Going ahead, cement capacity addition is expected to be 25 million tonnes, of which 10 million tonnes would come up in the southern market.
The company expects downward pressure on pricing, but since the cost structure has also fallen, the operating impact would be negligible. Overall, the third and fourth quarter of the current financial year may not be appealing.
The cement sector has underperformed the broader market, with more than a 20 per cent fall in stock prices over three-month high levels, despite a 69 per cent rise in net profit in the second quarter.
The cement stocks have reacted sharply, as subdued cement prices and rise in cost of production is likely to impact profitability going forward. The cement analyst at Kotak Securities expects freight costs to move upward due to increase in lead distances, as companies will scramble to serve distant markets on expanded capacities.
| CRACKS BEGIN TO APPEAR |
| |
Year-on-year growth rate in % for quarter ended |
| Sales * |
Operating profit* |
BPS chg in OPM* |
| Jun ‘09 |
Sep ‘09 |
Jun ‘09 |
Sep ‘09 |
Jun ‘09 |
Sep ‘09 |
| ACC |
15.12 |
9.97 |
90.17 |
49.78 |
1325 |
844 |
| Ambuja Cement |
18 |
16 |
-33.34 |
17.41 |
-2296 |
35 |
| Binani Cement |
60.83 |
41.21 |
77.73 |
143.67 |
308 |
1587 |
| Birla Corporation |
22.17 |
35.9 |
61.63 |
181.96 |
833 |
1719 |
| Chettinad Cement |
29.25 |
28.66 |
18.6 |
43.77 |
-301 |
378 |
| Dalmia Cement |
17.33 |
14 |
12.21 |
-11.41 |
-147 |
-766 |
| Grasim Industries |
29.54 |
19.24 |
58.48 |
74.79 |
588 |
863 |
| India Cement |
10.15 |
7.48 |
8.49 |
11.99 |
-50 |
123 |
| JK Cement |
24.69 |
19.51 |
69.59 |
141.88 |
809 |
1460 |
| JK Lakshmi Cement |
-2.43 |
21.12 |
267.5 |
99.21 |
-591 |
451 |
| Jaiprakash Associates |
57.85 |
60.05 |
67.65 |
66.55 |
186 |
102 |
| Madras Cement |
-3.04 |
7.38 |
28.46 |
8.18 |
813 |
25 |
| Mangalam Cement |
32.04 |
18.27 |
80.88 |
71.59 |
1017 |
1191 |
| OCL India |
76.52 |
29.95 |
63.54 |
49.94 |
-219 |
311 |
| Prism Cement |
19.74 |
40.37 |
35.97 |
98.24 |
531 |
790 |
| Rain Commodities |
45.47 |
55.13 |
25.04 |
-14.18 |
-430 |
-1290 |
| Shree Cement |
44.52 |
39.17 |
38.78 |
158.71 |
-94 |
1305 |
| UltraTech Cement |
30.54 |
10.36 |
58.96 |
54.3 |
688 |
926 |
| * All three columns relate to cement biz only (BPS: Basis points, OPM: Operating margin) |
Earnings of cement companies are highly sensitive to realisations and a lower price of Rs 20 a bag would lead to on an average 45 per cent decline in earnings, according to the cement analyst at Kotak Securities. India Cements are highly sensitive to cement prices on account of the high leverage of the company, while Shree Cement’s earnings are less sensitive on account of lower fixed costs, as well as non-cement revenues from the power business, and a low leverage. ACC, Ambuja Cement and UltraTech Cement may see a 45 per cent decline in earnings.
In the second quarter ended September, the cement companies reported a 69 per cent rise in net profit compared to 33 per cent in the first quarter.
The net sales were up 19 per cent, compared to 24.5 per cent in the first quarter. The operating margins improved by 750 basis points year on year, as all-India cement prices increased by six per cent during the second quarter.
However, the operating margins dipped 220 basis points quarter on quarter, due to a 170-points increase in total cost of production over the sequential quarter.
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