The Indian cement sector was among one of the country’s most robust performing sectors in the recent quarter registering over 65% bottom line growth and 25.6% growth on the sales front over the same quarter of previous year. The realizations of the cement companies have increased in the range of 12-15% year on year and 1-6% quarter on quarter.
Most of the cement companies have been operating over 90% of their installed capacity in order to bridge the gap between demand and supply, the demand has been at around 10% for quite some time. Will this sector continue to perform robustly and sustain its profitablity is something to to watch out for because of oversupply concerns by FY09?
According to a study of 20 major cement manufacturer’s in India we have found that their profitability has improved by over 84% in the first quarter of current fiscal where as their sales growth was around 28% over the same quarter of previous year.
According to a CLSA report on Q1 FY08 review, ACC’s and Grasim’s volumes have grown by 15.3% and 11.4% YoY respectively while Ambuja and Ultratech have faced capacity constraints leading to flat volumes. ACC results were below expectations on account of higher SAP implementation related expenses. Ambuja Cements results were also lower than estimates at an operating level on account of higher freight and other costs. CLSA is over weight on Grasim, Ultratech, India cements and recommends them as their top picks.
Broking firm, SSKI has reiterated their underweight stance on this sector due to oversupply concerns by FY09 as most of the leading players are in the process of pumping in huge amount of money for capacity addition. However, they have retained Grasim as outperformer owing to strong cash flows from the VSF business and likely improvement in sponge iron profitability.