Cement: Still on firm foundation

With post-Budget demand continuing to be firm, cement companies have been able to pass on the cost increases.

The hike in excise duty on cement and clinker in the Budget, along with the increase in transportation and fuel costs, have provided cement companies the perfect reason to raise prices to levels which would help boost margins. Demand, it appears, is strong enough to allow for such an increase, except in some areas like Gujarat and Delhi. Supply concerns haven’t played out as expected because of delays in new capacity coming on board.

Cement companies have announced a hike of Rs 10 per 50-kg bag on average across India, according to a ShareKhan report. The report estimates that the impact of the 2 percentage point-hike in excise duty, along with higher transportation costs (diesel price hike and higher service tax on rail freight) and clean energy cess on coal (Rs 50 per tonne), will add up to Rs 7.60 in additional cost per bag of cement, leaving companies with net realisations of Rs 2.40 per bag.

Meanwhile, data on dispatches in February from leading companies seem to suggest it isn’t all smooth sailing on demand. While the Aditya Birla Group (Grasim and Ultratech Cement) saw dispatches increase 9.4 per cent year-on-year to nearly 3.2 million tonnes, ACC saw dispatch volumes dip 2.3 per cent to 1.71 million tonnes. Ambuja Cements saw volume rise a modest 2.5 per cent over February 2009 dispatch numbers. Shree Cements, too, saw volumes rise by a modest 5.5 per cent. The exceptions were Jaiprakash Associates and South-based Dalmia Cement, which reported a robust growth of 60 per cent and 27 per cent, respectively, in dispatches.

Compared to the previous month (January 2010), the top three players (Aditya Birla Group, ACC and Ambuja) saw volumes dip, with ACC seeing the sharpest fall of over 10 per cent, followed by Aditya Birla Group (about 7 per cent) and Ambuja Cements (3 per cent).

Based on the volume growth of the top four players, a Morgan Stanley report says the strong turnaround (average 13 per cent volume growth year-on-year for the industry, to record levels of 18.2 million tonnes) recorded in January and the high base of last year could have made an impact on dispatches.

Going ahead, roads and other infrastructure projects, along with housing, are expected to provide sustained demand impetus in the long run, but analysts are cautious over the near-term pricing outlook. With new capacities becoming operational, cement prices are expected to come under pressure in the next quarter, they say.

In the last month, ACC and Ultratech have outperformed the markets by nearly 10 per cent and 12 per cent, respectively, while Ambuja was up 6.5 per cent and Grasim by 9 per cent against the Sensex’s rise of 4.6 per cent.