INDIA: Cost pressures, realty slump cause concern

Cement despatches across the industry barely grew 0.2% y-o-y in October 2011, according to reports of leading domestic brokerage houses. 

It was attributed largely to a high base effect in the year-ago period. The combined despatches of the leading players - ACC, Ambuja Cements and UltraTech Cement - fell nearly 2.1% y-o-y in October 2011, given the curtailed output at the Aditya Birla Group.

Industry-wide cement despatches during the first half of FY12 had grown nearly 4.5% y-o-y. With the monsoon season broadly over (except southern region), cement prices have shown signs of rising in several regions across the country, on expectations of a pick-up in construction activity. 

For instance, in Mumbai, cement prices are currently at Rs 280-290 per bag, a rise of nearly Rs 20 per bag from the monsoon season. 

Also, in New Delhi, prices are currently at Rs 270-280 per bag, nearly Rs 30 per bag higher, compared to the rainy season. And bullish investor sentiment had led both the Holcimcontrolled ACC and Ambuja Cements, respectively, to hit 52-week highs on November 14. 

However, cost pressures remain a cause of concern for the broader cement sector, despite some easing in key input prices, like global coal prices. For instance, Australian coal prices are currently at $113 per tonne levels and have eased from their average of $120 per tonne in the September 2011 quarter. This development comes at a time when the rupee has also weakened. 

Also, freight costs for cement companies are at elevated levels. Apart from that, home finance rates have not shown any signs of easing, and there are concerns that demand for cement from a key user industry, namely real estate sector, may be sluggish in the short-term. 

Analysts say that although the government has recently approved highway projects, there is considerable uncertainty regarding the implementation of the same and other infrastructure projects. 

ACC's consolidated operating profit margin had improved 130 basis points y-o-y to 13.3% in the September 2011 quarter, helped by strong realisations on a per tonne basis. ACC trades at a consolidated P/E of nearly 19.7 times on a trailing four-quarter basis, and appears expensive.