Cement companies, so far defiant on cutting prices, could soon be trapped in their own net with their huge investment plans set to result in oversupply by next fiscal - a situation that would hit profitability and force them to reduce prices, analysts said.
The supply of the construction raw material is expected to overtake the demand in 2008-09 when the capacity expansion projects of cement manufacturers are completed. This would bring down prices by 7-15 per cent and weigh down heavily on the companies’ earnings, analysts at domestic brokerage firm SSKI said in a report.
While companies have announced significant capacity expansion amid a dream run over the past two-three years with robust profitability driven by record high prices, they said, adding the supply-demand scenario was now set to turn negative for the sector.
Cement firms could see their annual earnings plunge 19-34 per cent during 2008-09 as the ongoing cement cycle is unlikely to extend beyond the current fiscal, they added.
The manufacturers have seen their share prices and profits significantly appreciate in the last one year even as they remain firm on not cutting prices despite the government repeatedly asking them to reduce prices as part of the efforts to contain inflation.
On an average, cement prices have increased from Rs 156 a bag in March 2004 to Rs 225 per bag in March 2007, driving revenues and profits of cement companies.