Cement firms to battle margin pressure due to weak pricing power

 



investors will likely be unhappy with the March quarter results of cement makers. A slackening in demand during a seasonally strong quarter led to sudden weakness in cement prices from mid-February. The inability to pass on costs to consumers could affect profitability.

While the companies may have sold 3-5% more cement compared with the December quarter, volumes will be down or flat for most large national cement makers when compared with the year-ago period. Demand for cement has been weak both from the infrastructure and real estate segments. Further, the subdued pan-India price increase of about Rs.10-15 per bag (barring a relatively better trend in the eastern region) may not work in favour of the companies, because there have been a steep increase in costs over the past six months.

Freight and power expenses, which are the biggest costs in cement manufacturing, have seen incessant rise in the last one year. As a result, large cement companies may post a flat trend in operating profit when compared with the year-ago period. Analysts point out that poor operating leverage and realization per bag of cement sold is likely to hit operating margin and the cost per tonne, too, is likely to be higher by around 10% for the March quarter.

Corroborating the prognosis, a Motilal Oswal Securities Ltd report forecasting the full year trend says, “On a year-on-year basis, profitability growth would get negated due to sharp rise in freight cost (19.5% year-on-year) and lower dispatch growth in fiscal 2013.” Large pan-India companies such as UltraTech Cement Ltd, ACC Ltd and Ambuja Cements Ltd may show weaker growth rates in both revenue and profit when compared with the past three quarters. Regional players, where shipment distances are relatively less, may fare better.

But these negatives are factored into the stock price valuation. Shares of the three frontrunners mentioned above have contracted by around 20% over the last six months, given the industry’s expectation of a moderate 5-5.5% growth in cement consumption for fiscal 2013. The market outlook for fiscal 2014 is a tad better, given that consumption is expected to grow to 7.5%. But with enough unutilized capacity, any upswing will first see higher utilization. Cement prices, which are the key to higher realization and profitability, will perhaps gain strength post-monsoon.

 

AVINASH KUMAR

PGDM 2nd sem.