Cement volumes decline marginally in fourth quarter

While the quarter may see sharp declines in net profit, FY14 could see volume growth of 7%

Cement sector is the latest to face the heat of weakening demand. It has seen volumes fall one per cent year-on-year (y-o-y) in the fourth quarter. After the first half of FY13, companies in the sector saw pricing power diminish. Analysts believe average cement prices have remained largely flat sequentially at Rs 288/bag (up five per cent y-o-y). For the full year, demand for cement has grown a modest five per cent. While overall slowdown in the construction and infrastructure space has been a big culprit, shortage of other construction materials like sand and bricks have also contributed to weakness in demand. Cement demand has largely been tepid other than parts of southern and western India.

Demand collapse hasn't been the only problem in Q4. The recent increase in bulk diesel rates, coal prices and rail freight have put additional pressure on costs, which the companies are unable to pass on to consumers. This would obviously have an impact on the financials of cement companies in Q4. According to Emkay Global, weak pricing power has restricted industry's ability to pass on the cost increases leading to Ebitda/tonne decline 11 per cent y-o-y to Rs 943/tonne with overall Ebitda decline of 11 per cent y-o-y and net profit decline of 12 per cent y-o-y.

Analysts expect valuations of cement companies to come under pressure as there are no near-term triggers for a recovery. Ambit Capital expects profit after tax (PAT) of large cement companies to decline sharply in Q4. It expects UltraTech's operating profit to decline four per cent y-o-y, and lower other income would lead to PAT declining 14 per cent y-o-y. It expects Ambuja's PAT to decline 23 per cent y-o-y on higher depreciation and lower other income.

The outlook for FY14 is marginally better as analysts expect a volume growth of seven per cent. Profitability for select players would come under pressure if they are faced with increased supply from regional players. The current fiscal is expected to see capacity additions of 30 million tonnes.

Not all brokerages are pessimistic on the sector. Credit Suisse is building in seven per cent growth in volumes for FY14. It believes that for margins to move up and new capacities to break even, cement demand has to grow above six per cent. While acknowledging that demand from infrastructure is weak, Credit Suisse believes roads and railways are recovering. The brokerage expects growth in rural housing to sustain in FY14. "Housing constitutes two-thirds of Indian cement demand, with rural housing accounting for 40 per cent of total demand. We expect cement demand from housing to grow at an eight per cent CAGR, with the bulk of growth coming from rural India."