INDIA: Divergence in cement sector

The March quarter may see a sharp contrast in cement sector sales and profits between north and south India-based companies. An inkling of this can be had from the divergent cement price trends over the last few months. Prices in the north and east were 15-20% higher than in the south. Secondly, demand has moved downhill in the southern states with Andhra Pradesh being the worst-hit owing to the political turmoil surrounding the formation of Telangana.

To be sure, it’s not as if the pan-India scenario is all that great. Overall cement consumption for the year ended 31 March is likely to show a lacklustre 3.5% growth. Project construction, which accounts for two-fifths of total cement consumption, is sluggish. A Citi report says the capex would have fallen 20% in 2013-14, after a 21% reduction in the preceding year. Residential construction is also down on the back of poor demand and the resultant high inventory with builders.

In that backdrop, the southern woes are far greater than the other regions. Oversupply has been the bane of the south given the concentration of limestone reserves, a key raw material, in the region. Nearly 43% of cement capacity additions between fiscals 2010 and 2013 took place in the south. This has left it with about 40% of the country’s cement capacity now.

Meanwhile, demand growth has not kept pace with capacity increase, leading to poor pricing power. In contrast, the north and east have been better off, more so in the March quarter, due to plant shutdowns at Binani Cement Ltd. An Emkay Global Financial Services report says that while cement prices moved up about 6% in the north and central regions from December till March, prices in the South fell 10%. Dealers say, barring Chennai, where there is some price stability, any price hike in the south has not been sustainable. Obviously, this implies lower realization in the south, compared with other regions. Add to this cost pressures from rising power and freight costs. To be sure, all cement makers are caught in a quagmire of higher costs and low utilization, but weak demand would exacerbate the hit to earnings for south-based companies.

Big southern firms such as India Cements Ltd and Ramco Cements Ltd may report a higher-than-industry contraction in margins mainly due to low utilization. The former may post a steep drop in operating profit and possibly report a net loss, while the latter’s performance, too, is unlikely to enthuse investors. In comparison, manufacturers with stronger presence in the north and east like ACC Ltd, Ambuja Cements Ltd and UltraTech Cements Ltd are likely to be better-off. Although operating profitability may take a beating due to cost pressures, the adverse impact would be moderate when compared with the last few quarters.

The divergence is likely to continue. There is consolidation in the northern and eastern regions with big manufacturers such as UltraTech and Holcim(Ambuja and ACC) getting bigger. The south remains fragmented with more than 30 firms, which will keep a check on pricing power. Only a pick-up in the capex cycle that would absorb supply and improve capacity utilization can pull up profitability of southern companies. This is unlikely in the near term.