Earnings Review: Cement sector

Earnings Review: Cement sector

The cement industry had reported a 9.7% growth in their revenues on a year-on-year (y-o-y) basis to Rs 9813 cr during the quarter (Q3FY2009). This growth during the quarter was driven by a 6-8% rise in volumes and a 6-7% jump in average realization. The volume growth for India Cement was disappointing due to unscheduled stoppage of two of its plants.

However players like Shree Cement, Orient Paper and Industries and Grasim Industries have reported robust volume growth of 29.1%, 11% and 7.7% respectively due to capacity additions. The average realization for the industry grew by 6-7% y-o-y during Q3FY2009.

South-based players like Madras Cement and India Cements witnessed a strong growth in their realization due to robust demand of cement in south India. On the other hand, UltraTech Cement reported a good growth in its blended realization.

Margins under pressure

All the cement companies continued to face margin pressures on account of increase in their overall costs. The operating profit margin (OPM) of industry dipped 740 basis points to 25% during the quarter. The significant drop in the OPM is on account of huge inventory losses (due to softened coal prices) and higher freight cost. However, the recent reduction in diesel and imported coal prices is likely to benefit cement makers going ahead.

Poor operating performance (due to higher costs) along with higher interest and depreciation charges (on account of capacity additions) led most companies to report a declining profit for Q3FY2009. Overall, the PAT for cement industry declined by 24% to Rs 1340 cr during Q3FY2009.

Outlook

Given the fact that the real estate sector (contributing 55% to the total cement consumption) has still not revived due to inadequate demand, the volume growth, going forward, will be adversely affected. In addition to slowdown in real estate sector, the upcoming capacity is likely to bring down the utilization ratio and the average realization, going ahead.
We expect the realization to soften by 7-8% by FY2010. On positive front, cement industry is expected to benefit from the recent cost moderation due to higher than expected correction in coal, crude and packaging cost. Furthermore, the recently announced 4% reduction in excise duty has helped companies save Rs3 to Rs5 a bag (as companies have not passed on the full benefit to end users).

However, we expect that the correction in realization will be greater than the benefit expected from cost moderation, so the overall earnings before interest, depreciation, tax and amortization (EBDITA) per tonne is likely to be on a lower side for FY2010. In such a situation, companies like Shree Cement and UltraTech Cement will benefit from relatively early commissioning of their capacities and investment in captive power plants.