India: cost pressures, realty slump cause concern

India: cost pressures, realty slump cause concern
Published: 23 November 2011

Cement despatches across the industry barely grew 0.2% YoY in October 2011, according to reports of leading domestic brokerage houses.

It was attributed largely to a high base effect in the year-ago period. The combined despatches of the leading players – ACC, Ambuja Cements and UltraTech Cement – fell nearly 2.1% YoY in October 2011, given the curtailed output at the Aditya Birla Group.

Industry-wide cement despatches during the first half of FY12 had grown nearly 4.5% YoY. With the monsoon season broadly over (except southern region), cementprices have shown signs of rising in several regions across the country, on expectations of a pick-up in construction activity.

For instance, in Mumbai, cement prices are currently at INR280-290 per bag, a rise of nearly INR20 per bag from the monsoon season.

Also, in New Delhi, prices are currently at INR270-280 per bag, nearly INR30 per bag higher, compared to the rainy season. And bullish investor sentiment had led both the Holcim controlled ACC and Ambuja Cements, respectively, to hit 52-week highs on November 14.

However, cost pressures remain a cause of concern for the broader cement sector, despite some easing in key input prices, like global coal prices. For instance, Australian coal prices are currently at US$113/t levels and have eased from their average of US$120/t in the September 2011 quarter. This development comes at a time when the rupee has also weakened.

Also, freight costs for cement companies are at elevated levels. Apart from that, home finance rates have not shown any signs of easing, and there are concerns that demand for cement from a key user industry, namely real estate sector, may be sluggish in the short-term.

Analysts say that although the government has recently approved highway projects, there is considerable uncertainty regarding the implementation of the same and other infrastructure projects.

ACC’s consolidated operating profit margin had improved 130 basis points YoY to 13.3% in the September 2011 quarter, helped by strong realisations on a per tonne basis. ACC trades at a consolidated P/E of nearly 19.7 times on a trailing four-quarter basis, and appears expensive.