Cement makers continued their good run in the third quarter. The year-on-year net profits of companies rose 219% and net sales were up 47%. The combined net profit of the top 20 companies rose to Rs 2,212 crore in the quarter against Rs 694.5 a year ago. YoY net sales rose to Rs 12,285 crore from Rs 8,357.
Operating profit (net of other income), a measure of industry pricing power, jumped 158% Y-o-Y to Rs 3,480.5 crore during December ’06, compared to Rs 1,350.4 crore a year ago. The growth in revenue and profits continue to be driven by improvement in price realisation.
The industry’s sales realisation in Q3 rose to 51% to an all-time high of Rs 3,137/tonne. With excise duty constant at Rs 408/tonne, and expenditure growing at only 24%, higher prices resulted in more profits per tonne of cement sold. It’s evident that volume growth has become a marginal factor to the industry’s profitability.
The top five cement makers by volume - ACC, Gujarat Ambuja, Grasim, Ultratech and India Cement - reported Y-o-Y growth of 5-6% in sales volume during the quarter, against industry growth of 9.5%. This was more than made up by a disproportionate rise in sales realisation.
Given the industry’s cost structure, where two of the biggest cost components - excise duty on cement and royalty on limestone - is a fixed amount per tonne irrespective of cement prices, it makes sense to maximise cement realisation rather than sales volume.
Take, for instance, Prism Cement, Sanghi Cement and Mangalam Cement. They reported a decline of 10%, 20% and 17%, respectively in cement dispatches during the quarter. In comparison, their Y-o-Y sales realisations in the quarter were up 67%, 43% and 63%, respectively. This more than compensated for lower volumes.
Among larger companies, Gujarat Ambuja and Grasim reported the fastest growth in sales realisation. But in terms of net profit growth, India Cement and Ultratech Cement were toppers, thanks to their lower base last year.
Other three biggies continue to follow the trend. With increasing signs of supply limitations, companies can maintain margins at current levels. Ultratech, Grasim, Shree, India Cements and Jaiprakash Associates are the stocks to watch out for as they have the potential to outgrow the industry.