INDIA: Too early to celebrate sales growth

Coming on the heels of an average (industry) year-on-year growth of 7.7% in March and 6.2% in April, the numbers are impressive 

Cement giants Ambuja Cements Ltd and UltraTech Cement Ltd surprised the street with a good 11.9% and 10.6% growth in sales respectively during the month of May, when compared to a year ago. Even though ACC Ltd’s sales grew by a sober 3.1%, cement dealers are confident the pan-India sales average growth for May is likely to touch 9-10%.

Coming on the heels of an average (industry) year-on-year growth of 7.7% in March and 6.2% in April, the numbers are impressive. More so, when debates on the abysmal March quarter growth of 5.3% in gross domestic product seem to highlight gloom and doom for the infrastructure and construction sector. Analysts believe the growing demand for cement is perhaps on account of demand from housing sector, where the demand is growing.

A month ago, a CRISIL Research report forecast a growth in cement volumes of around 8% for fiscal 2013, compared to the year before. However, it may be too early to predict a trend. Besides, fiscal 2011 and 2012 had seen growth rates in cement slide to lows of 5.1% and 6.5%, after growing at a steady pace of 8-9% for a little over a decade.

In the last two months –April and May- sales despatches seem to have grown on a lower base. Note that average despatches in April and May 2011 declined by 0.2% and 0.4% from the year-ago period (2010). Further, price volatility is often a lead indicator of volatile demand. Hence, given that cement prices have softened by around Rs. 5-12 a bag (50 kgs of cement) during May demand could be sluggish in the coming months. The onset of monsoons would also hamper construction activity and therefore pull down cement demand.

Controlled production by manufacturers to buoy prices is another indicator that suggests demand is not that strong. Capacity expansions and production control have kept utilization rates low- an average of 75% in fiscal 2012. According a report by Brics Securities Ltd, “the oversupply situation is likely to persist until fiscal 2014, preventing a secular uptrend in prices.”

In the final analysis, sales despatches of cement companies no doubt mirror market demand. But they offer comfort to companies and investors only when high volumes are backed by strong and stable cement prices. The March quarter performance, which came on the back of higher sales volumes, did not see realisations match up to expectation. No wonder the three leading large-cap stocks ACC, Ambuja and UltraTech lost ground after having outperformed the BSE Sensex from January till March 2012. From April 2012 till date, ACC’s stock fell by 17.8%, Ambuja by 12.4% and UltraTech by 7%.

This is more significant going forward, given that the increase in freight rates and energy costs, along with excise duty hikes, need to be offset for companies to maintain their profitability.