Freight cost erodes India Cements net

Freight cost erodes India Cements net
Published: 27 January 2010

The December quarter results of India Cements Ltd disappointed the street, as freight costs eroded its profits. The firm’s net profit fell by 49% to Rs34.8 crore, compared with the year-ago period. Sequentially, profit was around 75% lower. Even after factoring in oversupply and weak demand in the cement sector, mainly in the southern markets, analysts had estimated a net profit of around Rs75-100 crore.

However, the combination of lower realizations in southern India and higher costs lowered its profitability. According to an analyst from an international brokerage, the freight cost was higher than expected. It increased from an average of around 14% of sales in the previous quarters to around 20% in the third quarter.

India Cements incurred higher freight costs as the lead distance of markets increased. In a conference call to discuss results, the company said it sold cement in farther markets such as Gujarat, Assam, West Bengal and Bihar, given the slack demand in Andhra Pradesh, Tamil Nadu and Karnataka. Higher freight costs were borne in a bid to hike the net realizations.

Also, the cement maker’s royalty payments for mines increased from Rs45 per tonne to Rs63 per tonne, and cost of fly ash, a key input in cement production, rose from Rs60 per tonne to Rs200 per tonne over a year. Operating profit margin for the December quarter slipped by 10 percentage points to around 15% from around 25% in the year-ago period. Notwithstanding these interim challenges, India Cements is striving to combat rising costs in the longer term. For example, coal prices are on the rise since April. From around $94 (around Rs4,350) per tonne during the third quarter, it is expected to touch around $115-117 per tonne in the coming months. The firm, therefore, has identified a coal mine in Indonesia for stable and regular supplies of coal.

One of the two 50MW power plants it is constructing will be operational in the first quarter of the next fiscal, which will rein in costs while ensuring power availability. The only positive during the quarter was that net sales increased by around 14% over the year-ago period to around Rs864 crore. But sequentially, given the bunching of new capacity in the south and the poor demand offtake due to political and seasonal factors in the region, net sales fell by around 13%. The net realization per tonne of cement during the December quarter fell to Rs3,019 from Rs3,638 a year ago and Rs3,534 in the previous quarter.