India: cement companies struggle with rising costs

India: cement companies struggle with rising costs
Published: 22 October 2010

With India looking to spend billions of dollars over the next few years to develop its creaking infrastructure, it would be fair to assume that cement companies would be among the top beneficiaries.

After all, the country needs mountains of cement as it goes about building new bridges, dams, roads and power plants.

But, a look at the third-quarter numbers of ACC Ltd. and Ambuja Cements Ltd., India’s second- and third-largest cement makers by capacity and subsidiaries of Switzerland-based Holcim Ltd., shows a very different picture.

ACC, the bigger of the two, Thursday said net profit plunged 79 per cent and sales fell 15 per cent  thanks to lower prices and output. Ambuja Cements also reported a decline. Its net profit fell 52 per cent  and sales shrank 2.9 per cent.

The numbers were lower than analysts had estimated. Analysts had expected ACC’s bottomline to fall 54 per cent  and Ambuja’s to dip 33 per cent.

HeidelbergCement India, a unit of Germany’s HeidelbergCement AG, too reported a 90 per cent  drop in net profit earlier this week.

Rising costs of power, cement, diesel and limestone have hit the companies where it hurts the most – margins.

This is the monsoon quarter, which always sees a big drop in construction activity, but it hasn’t been this bad for cement makers in quite a while, analysts said.

“This is probably one of the worst quarters for cement makers,” says Rupesh Sankhe of Angel Broking.
Still the shares don’t seem to have been shaken too badly by the weaker-than-expected earnings.

ACC shares rose 3.12 per cent  to close at INR982.6 Thursday while Ambuja Cements rose from the red to outperform the broader market, rising 3.12 per cent.

The pair continued their strong showing in early trade, with ACC still showing relative strength at INR973 , INR6below yesterday’s close and Ambuja Cements at INR144 —not very far away from its 52-week high of 150.35 rupees.

While investors rode the wave that saw the broader market rise two per cent , they can look forward to more advances in the cement shares and stronger earnings in the future thanks to the overall supply and demand scenario.

The cement industry is slated to add about 30Mt of capacity in the next couple of months, in addition to the 268Mt it already has.

Meanwhile this year’s good monsoon is sure to lift rural spending and raise demand for cement.

That cement prices in southern India—the biggest market region in the country–are already up a whopping INR120/ 50kg bag from July end—a sure sign of robust demand up ahead.

With cement production lower this year over the last, prices are sure to rise still further.

Even the eastern region, the smallest consumer of cement has seen prices rise 20 per cent in the past two months.

With the governments focused on keeping the economy growing at around eight per cent, earnings growth will come when demand catches up with supply.

A young and expanding workforce, rising domestic demand, a growing middle class and the brisk pace of construction activity across the country all point to better times.

The outlook may seem overcast today, but it’s sunny skies up ahead.