Cement firms’ earnings expected to be under pressure in FY12
Moneylife Digital Team 27 April 2011

Higher input costs are eating into margins of companies and cement makers will be particularly hurt by a demand-supply gap, analysts suggest

Indian cement companies' earnings will remain under pressure through the financial year 2011-12, on account of over-capacity, weak realisations and rising input costs, according to industry analysts.

"The cement sector faces an oversupply situation. The demand-supply gap is likely to remain significant, despite expected double-digital growth in FY12," Novonil Guha and Gurpreet Kaur, analysts with BRICS Securities, said in a report. "Cement prices should remain volatile as production arrangements among players are not likely to sustain over the medium term. This would mean uncertainty in cement earnings till FY13."

CRISIL researchers point to rising input costs that would likely eat into the margins of Indian companies in the current fiscal, and cement, shipping, real estate and textiles will witness a sharp decline in profitability.

Prices of imported coal have increased by around 30% to $141 per tonne compared with $110 per tonne in the corresponding period last year. While domestic coal prices have also surged by almost 150%. The impact of surging input costs, lower realisation, oversupply and depressed demand was evident in the fourth quarter results of cement companies.

On Tuesday, ACC, one of the country's largest cement producers, reported that consolidated net profit for the January-March quarter declined by 11% to Rs350 crore, against Rs393 crore in the year ago period, mainly due to high input costs. However, volumes increased to 6.16 million tonnes in the quarter from 5.58 million tonnes in the year-ago period.

Ambuja Cement also reported a 12% decline in net profit to Rs407 crore from Rs462 crore a year ago, while net sales stood at Rs2,207 crore, an increase of 11% from Rs1,990 crore a year earlier. In contrast, UltraTech Cement's net profit rose 218% to Rs727 crore in the January-March 2011 period, compared to Rs228 crore in the previous corresponding quarter, while net sales  surged 135% to Rs4,490 crore from Rs1,909 crore.

The decline in the margins is attributed to depressed demand, lower utilisation rates, and high supply. "FY11 recorded industry demand growth of 5.3%, the lowest in the last ten years," UltraTech said in a statement. "This was primarily on account of de-growth in various key cement consuming states, driven by lower infrastructure spending, a slowdown in the realty sector, an extended monsoon and non-availability of railway wagons."

The cement industry has seen around 80 million tonnes of fresh capacity addition in the last two years and that has led to lower capacity utilisation in past year. According to BRICS analysts the capacity utilisation is likely to be 77% and 85% in FY12 and FY13, respectively.

Oversupply in the market will put pressure on cement prices. Though cement makers adopt the supply discipline strategy to hold prices, it would not sustain over the long term, the analysts said. "The pricing environment may remain challenging and with the impact of surplus capacity, margins may continue to remain under pressure," UltraTech stated.

However, there is also a view that demand in the current fiscal could see an upward momentum as it is the final year of the Eleventh Plan, so infrastructure projects are likely to get some acceleration. "The cement industry is likely to grow more than 8.5% on the back of government initiatives in rural development, infrastructure and housing," UltraTech said.

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