Cement: Volume uptick continues

Despite higher volumes & realisations, cost push may prevent margin expansion

All’s well that ends well, they say. This adage seems to be true for cement companies in 2011-12. The year started on a challenging note, as the industry was plagued with a capacity glut, slowing demand and rising input costs. But the sector has sailed through the period with sustained price rises. A pick-up in demand, thanks to increased activity before the state elections, helped. As a result, the fourth quarter has been a good one for the top five companies. Analysts expect all-India consumption to have grown 10 per cent to 64 million tonnes (mt) in the fourth quarter.

Prabhudas Lilladher, the financial services company, expects consumption for the full year (2011-12) to settle around 225 mt, a growth of seven per cent. Strong demand from central, western and northern India has helped the sector clock healthy double-digit volumes in these regions, even as demand in the south and east remained muted.

On the back of improved demand, prices rose Rs 5-10 per bag (50 kg) across regions in the fourth quarter. According to analysts, in March, JP Associates and Shree Cements have seen a year-on-year volume growth of 32 per cent and 30 per cent, respectively. Ambuja Cement and ACC grew 12 per cent and 7.3 per cent, respectively. UltraTech remained a relative laggard with the lowest growth rate 6.3 per cent, says Religare.

The demand momentum is expected to continue in 2012-13, analysts say. Over the past year, the sector has shown maturity in the face of a demand-supply mismatch. The companies are expected to end the year with higher revenues on the back of increased realisations on price rises.

Prabhudas Lilladher expects ACC’s revenue to increase 20 per cent year-on-year on the back of a 11 per cent increase in realisations and 8.5 per cent growth in volumes, at 6.7 mt. However, Ebitda (earnings before interest, taxes, depreciation, and amortisation) expansion may be restricted to nine per cent levels. Similarly, UltraTech may see a volume growth of eight per cent, but Ebitda expansion may be limited. Despite the resilience shown by the sector and pricing power, valuations of the top five companies have all these priced into their stock prices, leaving little room for further appreciation.