Slowdown in earnings expected for cement firms

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)