INDIA: Cement: Margin pressure

Low demand and rising capacities will continue to exert pressure on price realisations.

December brought some respite to cement companies after they saw overall sales plummet 5.4 per cent year-on-year and 18.4 per cent sequentially during November. ACC’s December despatches grew 2.1 per cent year-on-year to 1.92 million tonnes (mt), while production surged 2.7 per cent to 1.91 mt. Ambuja Cements recorded growth of 5.61 per cent in despatches, while Jaiprakash Associates reported a 28 per cent rise.

Cement manufacturers had hit a rough patch in November, courtesy heavy stocking in anticipation of demand growth after monsoon. However, the demand remained sluggish, forcing analysts to revise estimates. Analysts at Kotak Securities have cut their demand growth estimate for 2010-11 from 10 per cent to 7.6 per cent.

Lower demand, coupled with incremental capacities, will continue to exert pressure on price realisations, reckon analysts. Rising coal prices may also continue to hit margins. December saw cement prices fall by Rs 10 on an average, bringing the national average price at Rs 230 for a 50-kg bag.

For the year ended December, analysts at Ambit Capital peg ACC’s revenues at Rs 7,843.7 crore and adjusted profit at Rs 1,219.2 crore, down 4.2 per cent and 24.1 per cent year-on-year, respectively. They estimate the fair value of the stock at Rs 1,126.

Ultratech, hit the hardest in November with sales plummeting 9.25 per cent year-on-year, saw December despatches (3.27 mt) and production (3.22 mt) in line with the December 2009 figures. A strong brand name and distribution, coupled with consolidation of Samruddhi Cement’s assets, may help revenues grow 88.26 per cent during 2010-11 to Rs 13,272.1 crore. However, realisations can come under pressure due to more exposure to South and West India. According to Ambit Capital estimates, Ultratech’s adjusted profits are likely to rise 55.6 per cent to Rs 1,701 crore, with the fair value of the stock being Rs 1,307.