Cement prices have been the talk of the industry for a very long time. South India prices tanked for the first time in two years this season. Recently, the price per bag of cement in the west zone of India dropped nearly Rs 5-10. With slow growth in infra and construction segment, and realty pack too seeing a downturn, will cement companu earnings be affected too badly? CNBC-TV18 catches up with VM Mohan, chief financial officer, India Cements , to get his view on the sector and his company performance in specific.
Speaking to the channel, he says that pricing remains stable in most markets now and the drop in the west was mere correction. Per bag of cement costs Rs 260-300 in South India. He however says that prices could go up in future, but India Cements is poised to make do with it, especially due to the current surplus and capacity addition.
“Low growth in Andhra Pradesh is affecting operating performance of the company,” says Mohan. He expects utilization to improve once the Telangana issue is resolved.
Currently, capacity utilization in South India stands at 65% for the cement companies, he says.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: How have prices been this quarter for Indian Cements and generally what are the pricing trends in South India today?
A: Currently, the prices are quite okay. There have been no slippages and we have been maintaining prices; there have been no major increases as well. Going forward, we will be happy if we could maintain the margins and if we are able to pass on the cost increases that could take place, especially because of the current surplus that is available, and also the capacity that is likely to come on the pipeline.
Q: There were reports last week that prices in west India had gone up Rs 5-10 per bag, any such increase in South India? And what are the prices per bag compared to trading at in other parts of India?
A: In the west, there had been significant drop in prices which they are recovering now. They need to recover still more to catch up with levels that they were at couple of months ago. As far as South is concerned, there has been no retraction and we are just maintaining those price levels. It varies from market to market and it is from Rs 260 to Rs 300, depending upon the market.
Q: What are the demand conditions now like in South India because we keep hearing that even for companies such as yours, the capacity utilisation is no more than 60%?
A: Yes, you are right. The industry is operating around 65-70% levels. In the last pwo years, we have had one of the worst periods as far as demand is concerned. We have never seen two successive years of de-growth in this industry. For instance, Andhra has had negative growth of more than 20% last year and even year before last. South, as a whole, was pulled down because of Andhra’s negative growth.
We believe, going forward, there are few positives we are looking at. We have had a good monsoon during the current year. The Andhra base effect will come into play right now. Actually, what used to be selling close to about 1.8 million tonnes a month, it has come down to nearly 1 million tones now. We don’t believe it could go down further, unless something major hits the industry.
I am sure the Telangana issue will get addressed sooner than later, and we have seen two successive years of negative growth followed by a huge jump in demand. We believe the same thing is likely to happen in the coming two years. But as far as this year is concerned, we are just looking at possibly either flat or marginal growth in the South. The country as a whole, it could be about 5-6% growth.
Q: So where does that leave the supply-demand gap in Southern part of the country? I believe that 10 million tonnes could be added in capacity in this fiscal, would that lead to fair degree of oversupply still?
A: Oversupply is already there. We are just operating at 65-70% which is almost 30% lower than our capacity. So the additional capacities will marginally add up, but it will take a little time for new capacity to stabilise. By that time, we believe positive impacts on demand growth will come into play and this may get absorbed. So it may take a couple of years for the industry in South to reach reasonable utilisation levels.
Q: So with stable prices and flattish growth for the industry, where do you think that may lead revenue and profit potential for India Cements going forward into the next calendar year?
A: As we discussed, 70% is too low utilisation levels. Normally, we don’t give any guidance on the profitability numbers, but we are looking at flat volume levels for the current year, which is whatever we did during last year. The only positive is we have set up a capacity in Rajasthan and that will add up to our overall volume. Possibly, the group as a whole may end up between 10.5-11%, which is about 5-7% growth in terms of volumes for us.
Q: IPL did contribute a little to your revenues in the Q1. Any plans on that front going into the next calendar year in terms of monetising that asset?
A: We are not looking at monetising IPL at the moment. We see a great value in IPL franchise and are not looking at monetising at this juncture. Possibly, we may look at pushing to the next level, but certainly not monetising.
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