Go for cement cos with focus on South, West India?

Go for cement cos with focus on South, West India?
Published: 21 October 2008

According to a report by the Economic Times of India, a clear pattern is evident in terms of cement market trends, if one goes by the results declared by cement companies. Companies with a strong focus on southern and western markets stand to gain and should be the stocks investors should pick, say analysts. Results declared by UltraTech and JK Lakshmi reflect just that.

Analysts point out that stocks with a distinct focus on southern and western markets like India Cement, Madras Cements and ACC, could be the preferred stocks for investors, given that price realisations are still strong on a year-on-year basis in the September 2008 quarter. In contrast, the northern and central markets have declined on a YoY basis in Q2 FY 09.

India Cements and Madras Cements derive an overwhelming majority of sales in southern markets, while ACC derives nearly 19 per cent of its sales from southern markets and 13-14 % from western markets, say analysts.

UltraTech, which is focused on southern (about 23 % of total dispatches), western (52% of dispatches) and eastern (25% of dispatches) India, has grown its realisations on a y-o-y basis in the September 2008 quarter, in a bid to partially offset rising input costs, like imported coal. In contrast, JK Lakshmi, which is largely focused on northern and central markets, saw a decline in its net cement realisations in Q2 FY 09.

This comes at a time when the Cement Manufacturer’s Association has also highlighted that cement consumption in the markets of northern and central India has a shown a marked slowdown between April-August.

In the case of UltraTech Cement, its combined cement and clinker sales amounted to 3.98Mt in September 2008 quarter, a growth of 13 per cent YoY. In the domestic market alone, the company’s cement sales were 3.23Mt, a rise of 3 per cent YoY in Q2 FY09, with its net realisations at Rs3,468 per tonne, a rise of seven per cent YoY. In addition, its blended realisations also rose 3.9 per cent YoY to Rs 3507/t.

Nevertheless, the company has only been able to partially offset higher input costs, like coal via higher prices realisations, as its operating profit margins declined 660 basis points YoY to 22.4 per cent in the September 2008 quarter.

Meanwhile, UltraTech has started commercial production of clinker from its expansion at Andhra Pradesh and cement from the grinding unit in Karnataka. The company highlighted that upon complete commissioning of capacity at Andhra Pradesh, the company’s total capacity will increase to 23.1Mt by the end of CY 08.