Subdued demand, oversupply to weigh on cement industry

Muted growth in demand and cost escalations will squeeze the earnings of cement companies in the quarter to March 31, 2013, despite it being a seasonally strong quarter.

Against the backdrop of higher supplies, rapid execution of infrastructure projects and a pickup in the affordable housing segment is the key for cement industry growth in the coming quarters.

Slow progress in construction activities in the March quarter will result in the cement sector posting a subdued 3% volume growth year-on-year. Because of weak demand, prices remained mostly flat, with the eastern and central regions offering marginal relief to the companies. Cement prices in south India remained under pressure, with prices falling Rs 20-25 per bag of 50 kg in Andhra Pradesh.

On a pan-India basis, cement prices are expected to remain flat resulting in a 3-5% increase in net sales. Cement makers will witness a rise in operational costs, which will result in a fall in margins for most.

Input costs of basic materials such as gypsum, fly ash and slag have gone up on a yearly basis. The increase in diesel prices and railway freight will raise the transportation costs of companies by nearly 20%. The only relief, the 19% fall in price of imported coal, will be partially offset by an almost 9% depreciation of the rupee and higher power tariffs.

Among large companies, only Shree Cement is expected to see a healthy growth in earnings, helped by stabilisation of its power plant and its major presence in northern India. Southbased players such as India Cement, Madras Cement and Dalmia Cement are expected to bear the brunt of oversupply in South India, which is keeping realisations under pressure.

The stock prices of ACC and Ambuja Cement will remain volatile as concerns over an increase in royalty payment persist Their parent company, Holcim, had increased royalty from its Indonesian subsidiary last quarter. The ET Cement index has underperformed the broader Sensex in the last quarter by 8%, implying that the market has already factored in the weak industry scenario.

With the general elections in 2014, and interest rates expected to ease, demand may pick up in the second half of the current year. With newer facilities stabilising, utilisation levels are also expected to improve, thereby giving benefits of positive operating leverage to companies.