High input costs dent cement stocks

Recent price rises unlikely to help companies’ margins in the March quarter.

The shares of cement companies are trading lower than the pre-rise period, despite cement prices being at an all-time high. Industry experts say the rise in prices is unlikely to reflect in the stocks as cost pressures are on the rise.

Since the beginning of this year, companies have raised prices by Rs 40, taking the national average price to Rs 265 for a bag of 50 kg. With this, the industry has surpassed its previous all-India high of Rs 255 a bag in July 2009.

The shares of ACC are trading at a discount of eight per cent at Rs 988.15 compared to Rs 1,075.6 at the close of the last calendar year. Those of its sister-concern Ambuja Cements are worse hit, with a decline of over 13 per cent at Rs 124.45 a share.

During the same period, shares of UltraTech Cement, part of the Aditya Birla group, took a hit of 5 per cent whereas northern major Shree Cement’s stocks are available at 14.16 per cent cheaper at Rs 1,720. Shares of southern majors India Cements and Madras Cements have declined 15.24 per cent and 13.10 per cent, respectively.

“For a bag of cement, the costs have gone up by 15 per cent currently on a year-on-year (y-o-y) basis. The rate rises have come on the back of rising input costs and it does not mean an increase in the margins of cement makers,” said the research head of a domestic brokerage house. He said in spite of a steady rise in prices, the current quarter might see an erosion of 500 basis points on the operating margin front.

This is evident from the fact that the cement sector is largely being avoided by investment experts looking at the cost increases the companies are incurring and the situation of oversupply in the next few months putting further pressure on the margins.

The prices of coal, which make up 30 per cent of the cement companies’ costs, have moved up 35 per cent from $95 a tonne to $130 a tonne on a year-on-year basis. This has put an extra burden of Rs 270 for a tonne of cement on the industry, which procures 80 per cent of its requirement from Coal India and overseas (Australia and South Africa). The rest is from the open market, where the prices are almost in line with imported coal.

During the same period last year, the all-India cement prices were at Rs 244, which declined to as low as Rs 210 during the monsoon period. That resulted in net losses for regional players (especially southern companies) in the September quarter.However, the prices started rising in October, taking the all-India prices in December to Rs 225 a bag. That gave some relief to the companies.

The current installed capacity of the cement sector is 290 million tonnes per annum. However, the effective capacity (produceable capacity) is around 260 million tonnes.