The demand growth in FY15 remains relatively more favourable given the new government’s focus on revival of infrastructure and investment spending. The growth in FY15 has also been supported by a low base as cement production grew by merely 3% in FY14. During Apr-May 2014, cement production has grown by 7.9% YoY as against 3.7% in the corresponding period last year.
The industry has seen slowdown in addition of new capacities due to supply glut faced in recent times. Sabyasachi Majumdar, Senior Vice-President, ICRA Limited, says “Between FY11-FY14, the industry added 65 MTPA cement capacities as against 92 MTPA in the preceding 3-year period FY08-FY11. However, slowdown in demand resulted in decline in capacity utilization from 77% in FY12 to 72% in FY14 despite slowdown in fresh capacity addition. Going forward, we expect the industry to add 25 MTPA capacities in FY15, 23 MTPA in FY16 and 8 MTPA in FY17 as against the peak addition of 50 MTPA in FY10. Eastern region will lead the capacity expansion and is expected to witness about 20 MTPA capacity additions during FY15-FY17 followed by Northern region (13.4 MTPA). Southern region, which had witnessed the highest capacity addition in the last five years, will see a considerable slowdown.” Assuming a demand growth of 8-8.5% over the next three years, the all-India cement capacity uitilisation is likely to improve from 72% in FY14 to 75% in FY16 to 79% in FY17.
The wholesale cement prices in North and West came under pressure in Q2 FY15 due to monsoons. Post monsoons, the recovery in prices has been slow. Cement companies raised prices by Rs. 5-20/bag in October 2014 but prices again came under pressure in the months of November and December due to slow recovery in demand. For example, average wholesale cement prices in Delhi declined from Rs. 290/bag in Jul 14 to Rs. 268/bag in Sept 14. Post monsoons, prices increased to Rs. 288/bag in Oct but again declined to Rs. 260/bag in Nov 2014 and Rs. 253/bag in Dec 2014.
Cement prices in North have seen some recovery in Jan 2015. In South, prices remained largely stable post the hikes undertaken in Jun 2014 and were hovering in the range of Rs. 300-310/bag in Hyderabad market till Oct 2014. While there was a minor correction in the month of Nov 2014, cement prices again increased to Rs. 321/bag in Dec 2014. The price hike has been sustained in the month of January. Cement prices in Eastern markets have largely remained stable in this financial year. While average cement price in Q3 FY15 slid below last year’s prices in North and West, the average prices in FY15 (YTD) across most markets are higher than those in the corresponding period last year. Going forward, cement prices are expected to improve with recovery in demand.
There has been some easing of cost side pressures on cement companies over the past six months. Mr. Majumdar elaborates “International coal and petcoke prices have declined by ~20-25% in the past one year which is likely to reduce the power and fuel costs for cement companies. The effect is likely to be more pronounced for South based companies which depend heavily on imported coal. Further, fall in diesel prices has resulted in easing of freight costs for cement manufacturers.”
The operating income for the ICRA Sample increased by 15.5% YoY in Q2 FY15. However, the revenues and earnings of cement companies (barring South) came under seasonal pressure in Q2 FY15 due to monsoon season with operating income for ICRA Sample declining by 7% QoQ in Q2 FY15 and operating margins declining from 17.6% in Q1 FY15 to 15.4% in Q2 FY15. South based cement companies, namely The India Cements Limited and The Ramco Cements Limited reported healthy profitability in Q2 FY15 due to healthy cement realizations during the quarter in South.
For other cement companies, while the margins contracted due to arrival of monsoon season, they were significantly higher on a YoY basis. Overall, the operating margins for ICRA Sample improved on a YoY basis from 12.5% in Q2 FY14 to 15.4% in Q2 FY15. In H1 FY15, ICRA Sample reported a healthy YoY growth of 13.8% in revenues. The operating profitability also improved marginally from 16.0% in H1 FY14 to 16.6% in H1 FY15 driven by higher realizations. Going forward, we expect cement companies in East and South India to report higher profitability on YoY basis in Q3 FY15 due to healthy realizations in the region during the quarter and easing of cost side pressures following decline in international coal prices and domestic diesel prices. While companies in North and West will also benefit from decline in diesel prices, these gains may be offset by pressure on cement realizations.
No comments:
Post a Comment