India cement firms’ margins grow; price a concern

India cement firms’ margins grow; price a concern
Published: 06 November 2009

With growth in volume, good demand and dip in production cost, Indian cement companies have posted good numbers for the July-September quarter. However, despite reporting a growth in topline and bottomline, cement manufacturers are worried about the new capacities coming up that would pressure already reduced cement prices in the country.

The Holcim Group companies – ACC Ltd and Ambuja Cement – posted a growth of 60% and 27% in their Q3 net profits, respectively, as power and fuel cost reduced during the quarter.

An Ambuja Cement statement said, "Input cost moderated to some extend and Ebidta for the quarter improved by 13% year-on-year from Rs 409 crore to Rs 462 crore."

The company, however, maintained its concern on pressure on prices, saying, "Pricing pressure has begun to appear in certain markets, particularly in southern and central regions, and may persist up to 2010."

For Aditya Birla Group company Grasim Industries, capacity expansion by about 27% to 4.63 million tonnes resulted in a whopping 61% growth in consolidated net profit. Grasim CFO Adesh Gupta, while announcing the company’s Q2 results, had said, "Higher volumes, softening of fuel prices and enhanced share of captive power resulted in better operating margins."

Agreeing that it will not be an easy second half for cement manufacturers, Gupta said, "With new capacities coming on stream in the second half, margins are expected to be under pressure, along with pressure on prices."

J Radhakrishnan, an analyst with IIFL, said in a report, "Cement realisation for ACC and Ambuja Cement increased 2% quarter-on-quarter each in the September quarter, with prices remaining strong for most of the quarter in east, north and central regions. India Cement’s Ltd’s cement realisation dropped 5% QoQ on account of price declines, primarily in Andhra Pradesh."

Shree Cement, a cement major in northern India, saw its operating profit margin improve by 16.3 percentage points yoy to 45.4%, largely driven by a steep decline in the power and fuel cost (down 30.6%) due to the installation of a captive power plant and a fall in the average price of pet coke.

Experts say the third quarter will witness fall in realisation of the cement companies sequentially, as the dip in cement prices during Q2 is likely to impact the companies in Q3.

"We expect the cement sector to add around 76 mtpa capacity over FY2010-12, which is expected to eventually create oversupply in the market, as demand is not expected to catch up with supply in the short term. Moreover, all-India capacity utilisation is expected to drop to 78% in FY2010 from around 85% in FY2009," said Rupesh Sankhe, an analyst with Angel Broking, in a report.