Cement dispatches for the first half of the current year have grown by 10% and touched 81Mt compared with 74Mt in same period previous year.
But on a monthly basis despatches of the top four players (Grasim, UltraTech, Ambuja Cements and ACC) grew merely 2.6 per cent YoY to 51.88 lakh tonnes in September 2007, which was much slower than the growth recorded in July and August 2007, reported a leadinf financial daily. It was curtailed by Ambuja Cements’ despatches declining by 4.2 per cent YoY to 12.87 lakh tonne, due to the flood like situation at the company’s facilities at Ambujanagar (Gujarat) on August 8.
The second quarter results started on a positive note with Prism’s operating up a whopping 64.3% YoY to Rs 73.35 crore in the September quarter while net sales improved 21.1% to Rs 193.09 crore. Its operating profit margin expanded 1,000 basis points YoY to 38% in the September quarter. For its financial year ended June 2007, Prism’s operating profit margin had increased 1,670 basis points y-o-y to 43.1%. The company’s despatches in the September quarter were 5.73 lakh tonne when compared with 5.24 lakh tonne in the corresponding period of the previous fiscal. Its realisation works out to Rs 3,369.8 per tonne in the September quarter as compared with Rs 3,043.1 per tonne in the year-ago period.
This has further accentuated the positive view in the sector which has been going through good times on account of demand supply mismatch. The industry is operating at almost 100% capacity utilisation. With new capacities being added there are concerns over excess supply.
Although there are short term woes but the future concerns are high. Capacity addition of 68% is expected in the next couple of years. Capacity expansion of 111.5Mt during FY2008-11 and most of the announced capacity would be commercialised in FY09 and FY10.
According to Merril Lynch research report, “The industry’s supply-demand tightness to continue for the next 6 months & foresee short-term upside triggers for cement shares due to two factors: 1) we think producers’ will seek strong cement price hikes through the upcoming construction season (Oct ‘07 onwards), barring risks from early elections; 2) commissioning schedule of new capacities will become more visible to the market only later in the year (Dec ’07 onwards). On a 12-month horizon, we are worried that the industry’s large capacity pipeline will mostly materialise by Mar ’09 leading to pressure on cement prices from 2H FY09 onwards.” The brokerage is bullish on Grasim and has a buy rating on the stock with a target price of Rs 4450 but is neutral on ACC.
The near term scenario is expected to be positive for cement stocks as price outlook for October remains positive with Rs 5/bag hike expected across regions.
With second quarter results around the corner Edelweiss expects sequential growth in realizations to be healthy for southern players and flat for others. Volumes are likely to soften sequentially due to monsoons with an average decline of 8% QoQ in Q2FY08E. Core earnings are likely to be under pressure sequentially for pan-India players, due to a combination of muted realisation growth and lower volumes; it expects an average decline of 7% QoQ in Q2FY08E. EBITDA margins are, however, likely to be maintained.