Weak prices, demand to hit December quarter show

Continuing weak demand from housing and infrastructure sectors will impact financial performance of cement companies in the quarter to December. Average cement price fell to Rs 289 per 50-kg bag in December from Rs 298 in October, according to some brokerages. Prices fell across the five regions on yearon-year basis in contrast to the previous quarter when the southern region managed to keep prices firm.

Cement manufacturers are, thus, expected to clock lower volumes, which will consequently impact their realisations. Depending upon the companies’ ability in dealing with costs, realisations are expected to fall in the range of 1-15%.

According to a Bloomberg brokerage report, sales of Nifty cement firms such as Grasim Industries, ACC, Ambuja Cements and Ultratech are expected to fall in the range of 1-8% year-on-year.


Besides weak demand and fall in prices, two other factors are likely to erode revenues of cement companies in the December quarter. First, there is 15% railway surcharge on freight levied on cement companies. Although this surcharge was made effective from the September quarter, its impact will continue in the December quarter. Typically, there is no such surcharge in the July-September period, while the railways levies a 15% busy surcharge in the nine months to June.

Second, the rise in diesel prices will have an impact. In the December quarter, all-India average diesel prices rose 12.7% year-on-year to Rs 56.8 a litre. For Nifty cement companies, power and fuel costs constitute close to 21% of their net sales. These costs will wipe out substantial portion of revenues of Nifty cement companies and result in a 25-45% decline in their net profits in the December quarter.

However, firms such as Shree Cement and Birla Corporation, which have efficiently managed costs, will be less impacted. The average production cost in the last 12 months at Shree Cement was Rs 2,600 a tonne, while it ranged from Rs 3,300 to Rs 3,600 for its peers. This makes Shree Cement one of the most cost-efficient cement companies in India.

On the valuation front, on a oneyear forward basis, Birla Corporation and Grasim Industries are trading at EV/EBIDTA of 4.2 and 4.7. This is better than largesized players such as Ultratech Cement and Ambuja Cements, which are trading at EV/EBITDA of 11.4 and 12.3, respectively.