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The third quarter (Q3) has been brutal for cement companies and the pain isn’t over yet. As profitability continued to fall, firms have revised volume growth guidance for the current year and the next, as scope for any recovery in demand seems remote. Profitability of cement companies in Q3 declined 28 per cent year-on-year (y-o-y), lower than the 42 per cent drop seen in the previous quarter. Consequently, analysts expect FY14 volume growth to be between one and three per cent. For FY15, analysts estimate a volume growth of three to five per cent.
Cement stocks have underperformed the broader markets by 10 per cent over the past six months and by 20 per cent over the past year, as profitability has been under pressure and volume growth has remained tepid. However, stock prices have not declined as much as earnings. While earnings have declined between 28 and 41 per cent, cement stocks have fallen anywhere between 20 and 24 per cent, as the Street continues to believe FY15 would be a better year.
Motilal Oswal says while cement prices have increased in markets other than the South, sustainability of higher prices is uncertain in a weak demand environment. What may come to the rescue are lower costs.
Companies have been focusing on lowering costs by improving efficiencies. Stable tariffs have helped.
Analysts are advising caution, as stock prices have not corrected in line with weakness in demand and earnings. Kotak Institutional Equities believes rich valuations refuse to revise its stance on the sector, as valuations remain rich compared to benign earning assumptions. Even if peak construction season fuels a pricing action-led rally in the near-term, it would not sustain. The past four quarters have been very tough for the sector, as real estate and infrastructure - the key sectors that consume cement - have been in doldrums. Construction activity has sharply come down as demand has dried up. These conditions are expected to continue for another six-to-nine months, believe analysts, which would keep the pressure on realisations. Further earnings downgrades are likely.
