INDIA: India Cements returns to black in Q2

The India Cements Ltd. (ICL) has returned to black in the second quarter ended September 30, 2014, after reporting loss for four quarters in a row.

It has reported profit for the quarter despite a drop in volume and rising cost pressures. This was possible mainly due to an increase in net plant realisation.

The company reported a net profit before tax of Rs.7.49 crore for the quarter under review against a loss of Rs.31.44 crore in the same period last year. Sales volume was down three per cent at 23.51 lakh tonnes against 24.40 lakh tonnes. Net sales were higher at Rs.1,131.68 crore against Rs.1,085.93 crore. The company took a knock of Rs.8.81 core in foreign exchange loss during the quarter under review.

Variable cost was up four per cent due to a combination of increase in freight charges caused by load curbs by transport authorities and increase in royalty, among others.

The net plant realisation for the quarter under review stood at Rs.3,506, up from Rs.3,060 a tonne in the same quarter last year. Sequentially, there was an increase of nearly Rs.200 a tonne in net plant realisation for the quarter under review vis-à-vis the first quarter of the current year.

Addressing a press conference here on Wednesday, T. S. Raghupathy, Special Adviser to the Group, said the cement industry reported a nine per cent growth in the first-half. However, the growth in the South was the weakest among the regions, he pointed out. Tamil Nadu, Telangana and Andhra Pradesh, the principal markets for India Cements, virtually saw de-growth, he said. The bifurcation of composite Andhra Pradesh was expected to trigger a rise in demand, he said. “We have not seen this happening. Every one is taking a cautious approach,” he added. The Securities and Exchange Board of India (SEBI) had observed that the company could not adjust certain non-recurring exceptional items of expenses (recompense paid to banks of Rs.57.13 crore and fuel and electricity charges of Rs.69.43 crore) against general reserves as part of the merger of Trinetra Cement and Trishul Concrete Products with The India Cements. Consequently, the audit committee of the company has recommended modification of the financial statements, which resulted in the loss increasing to Rs.162.41 crore for 2013-14, up from Rs.35.85 crore reported earlier.

To a query on the proposed move to raise funds to the tune of Rs.500 crore, V. M. Mohan, President, Corporate Finance, said it was primarily intended to improve the leverage and meet normal capital expenditure.

On the move the spin off Chennai Super Kings (CSK) into an independent entity, he said this could help CSK to look at sports in its totality going forward.

The shares of India Cements closed on the BSE at Rs.108.10, down from Rs.109.10 on Tuesday.

UGANDA: Hima Starts Bulk Cement Business Line

Hima Cement has said it has strategically positioned itself to meet demands arising from the construction boom in Uganda with the launch of their Bulk Cement business line.

Bulky Cement business is a new delivery service that offers contractors a more efficient mode of receiving cement at their construction sites. This reduces logistics costs associated with handling bagged cement.

It involves having trucks that carry cement in large quantities direct to construction sites. Each truck has a capacity to transport 28 to 32 tons of cement.

This means a cleaner environment and faster completion of projects as less time is spent loading, unloading and emptying the cement from bags. This will also save contractors from pilfering and tearing losses.

"This mode of delivering cement is the standard practice in developed countries. Uganda is on a rapid growth path and as a key player we are ready to meet the demands in this market. We are evolving from being a producer of cement only, to a partner for solutions," said Daniel Pettersson, Hima Cement Country CEO during the bulk cement launch at Kyadondo Rugby Grounds.

The introduction of the service comes as the country sees a rise in the number of big infrastructure projects boosted by high levels of public and private investments.

Investments in transportation infrastructure, power plants and utilities, commercial construction and property development are expected to rise further in the forthcoming years prior to first commercial oil production.

Pettersson said demand for Cement in the country is projected to grow at a faster rate of 13% outpacing GDP 7% and electricity demand at 10%.

"In 2010, Hima Cement made a significant investment to increase production capacity to 900, 000 tons a year. The new bulk cement service will now make the delivery system more efficient for our customers," he added.

In this year's budget the government allocated Sh2.6 trillion to the roads and construction sector calling for improved service delivery by all suppliers.

The country remains committed infrastructure development and industrialization and there is a lot of progress as the country's oil reserves elicits private interest in the market.

UK: Cauldon Cement works excluded from the sale of Lafarge Tarma.

MORE than 150 jobs are set to be secured after it was revealed a cement plant in the Staffordshire Moorlands is to merge with another operator.

After months of speculation it has been confirmed the Cauldon works near Waterhouses is to be excluded from a sale of the assets of its parent UK Lafarge Tarmac.

It comes after Lafarge and Holcim, a global leader in the manufacturing and distribution of cement and aggregates, last week formally notified the European Commission of their proposed merger.

Now subject to the successful completion of the proposed merger and regulatory approvals, the Cauldon plant and associated assets could become part of a future Lafarge/Holcim business in the UK.

OMAN: Raysut Cement plans to build a distribution facility in Duqm

Raysut Cement Company (RCC), Oman's biggest cement producer, on Sunday said it is building a distribution terminal in Duqm and additional silo capacity in the Salalah plant.

The company is also building an offshore un-loader and blow pump system in the north to facilitate bulk cement handling. "The work is in progressive stage for some of these projects and the company would reap benefits from these starting from the early part of next year," stated Ahmed bin Alawi bin Abdulla Al Ibrahim, chairman of the company, while announcing the company's third quarter results.

The company also is exploring avenues of spreading its marketing potentials beyond Oman market. 

Raysut Cement Company also said its profit for the first nine months of 2014 rose by eight per cent to OMR23.26 million from OMR21.52 million for the same period last year.

Profit before tax earned by the parent Company in Oman stood at OMR20.25 million, while profit earned by subsidiaries like Pioneer stood at OMRO 3.42 million, Raybulk at OMR0.67 million and Raysea Navigation at OMR0.03 million.

The Raysut Cement group has earned revenue of OMR70.76 million for the period, against OMR70.19 million for the same period last year. 

"While there are positive signs of growth in Oman market, the same is not being translated into cement demand due to sever competitions from the UAE suppliers. The competitions are also experienced in the Yemen and east African markets.

Pressure on volume

UAE is still to engineer significant growth so that the local supplies can be absorbed instead of being offloaded to Oman. So this has caused a considerable pressure on volume and price in the north market for RCC plant," added the chairman. 

The parent company has achieved sales revenue of OMR50.43 million during the period ended September, 2014. "In spite of competitions in the northern markets and volatility in the export markets, the parent company could largely cover the revenue of previous period with a smaller decline of one per cent." 

The group as a whole has sold 2,830,158 tonnes of cement during the period ended on September 30, 2014 against 2,792,256 tonnes of cement sold during the corresponding period of previous year.

The group as a whole has produced 2,461,305 tonnes of clinker and 2813005 tonnes of cement for the first nine months of 2014, against 2,473,426 tonnes of clinker and 2,786,836 tonnes of cement produced during the same period last year.

THAILAND: Siam Cement

Key takeaways from NDR in Singapore. Last week, we arranged a non-deal roadshow in Singapore with SCC, led by Khun Nithi Patarachoke (VP Cement and Building Materials, Domestic Market), Khun Kulachet Dharachandra (Corporate Planning Director) and the IR team. Management seems positive towards the short-term outlook, with cement and building materials units already at bottom and an improving chemical unit. Investors were impressed by its concrete LT plans for all business units.

LT plans. These include expansion into ASEAN and a higher portion of HVA (high-value-added) products and services (34% now, rising to 50% over the LT). SCC has set capex at Bt40-50bn/year for the next five years. Of this, ~50% will be invested in cement and building material units (new cement plants and buying building materials assets), and the rest in the chemical (Vietnam chemical complex and debottlenecking of Chandra Asri) and paper (packaging solution and improving productivity in fibrous chain) units. It maintains its dividend policy at 40-50% of net profit. 

Cement and building material unit (43% of 9M14 earnings). 

SCC said domestic cement demand hit bottom at -3% YoY in 3Q14, improving to flat growth in Oct 2014. It expects local cement demand to grow at least 5% in 2015 (vs. 7% in 2009-13) from 0% in 2014F thanks to a return of government projects (30% of usage) from normal budget disbursement, growth in commercial projects (20% of usage) after the appointment of a BOI board, plus greater construction permit approvals and better sentiment. It also expects residential use (50% of usage) to improve, particularly for developer-initiated projects (40% of residential) with a return of presales, but it does not expect owner-built housing (60% of residential) to grow much given the fragile farm income and high household debt. Local building material demand is set to grow at least 5% in 2015 from -4% in 2014F. 

Government disbursement for the Bt2.4trn in infrastructure projects is expected at earliest in late 2015. The direct impact on cement usage is not high (~8-10mn tons over 8-10 years); indirect impact is much larger via stimulating private investment. 

Local cement price will be firm, backed by tight industry utilization rate at 85-90% with minimal impact from TPIPL's incremental supply (5% of demand in 2015F). 

Cement production cost per unit is set to be unchanged in 2015, with lower coal costs (35% of cost) offset by a potential rise in electricity cost (35% of cost). 

Construction of its new cement plants is on schedule, adding 6.3mn tons to cement capacity: 0.9mn tons in Cambodia (2Q15), 1.8mn tons in Indonesia (3Q15), 1.8mn tons in Myanmar (2Q16), and 1.8mn tons in Laos (2Q17). 

SCC will enjoy double-digit cement demand growth as supply remains limited in Cambodia, Myanmar, and Laos (all net importers). To lower its logistics cost, it can use these overseas plants to serve demand based on location rather than country; for example, its Laos plant is much closer to northeastern Thailand (100km) than its Saraburi plant is (400km). For Indonesia, though there will be more supply over the next few years, the impact on its new cement plant is limited, given: 1) 50% captive demand from its RMC and lightweight concrete block plant; 2) 50% is sold via its distribution channel (Kokoh), with just 2% of that depending on local demand. 

SCC conservatively expects to achieve the same margin at its overseas plants as Thailand's, thanks to higher ex-factory selling price (US$60-75/ton vs. Thailand's local price of US$60/ton and export price at US$45/ton), relatively the same or cheaper production costs, though initially operating costs will be higher.

After the startup of new overseas capacity, with the lower logistics costs, SCC will gain because a portion of the low-margin export sales (4mn tons now) will be instead directed to the local market, where margin is higher (+6.3mn tons, +40% to current local sales volume of 16mn tons). The remaining capacity in Thailand can serve local demand over the next 5-10 years. 

Of global ceramic players, SCC is #1 in terms of capacity but #6 in terms of revenue. Longer term, it plans to rationalize product mix in each country.

SCC is an integrated player in ASEAN, providing structure (cement), and building materials and distribution, providing more value than would just one activity alone.

Chemical unit (35% of 9M14 earnings). 

The dip in oil price will give a ST benefit in the form of wider chemical spreads, seen in the PE/PP-naphtha spread of US$810-849/ton (+40% YoY and +20% QoQ) in Oct 2014. Though spread might narrow for the rest of 4Q14 from the drop in product selling prices in tandem with the dip in feedstock costs, it should be somewhat better than 3Q14's US$691-716/ton from a favorable demand/supply picture. The inventory loss should be manageable at Bt500-700mn in 4Q14. Its chemical sales volume will be solid, as some buyers delayed shipments from late 3Q14 (when prices began to trend down) to 4Q14. 

PE/PP spreads (70% of its consolidated earnings) are slightly above mid-cycle and SCC expects to see spreads widen further given firm demand growth of 4% p.a. (consumer and capital goods) and limited new supply growth of 3-4% p.a. through 2017. Recovery of PVC spreads (30% of its consolidated earnings) will take at least six months in the presence of weak demand on low construction activities in China and high EDC costs. For its associates, MMA spreads will be healthy from firm demand in consumer and capital goods, while BD and PTA spreads will be weak in the ST from weak rubber prices and high incremental supply from China. 

Progress of investments: The debottlenecking of Chandra Asri (30percent stake), Indonesia's only chemical complex, will add 44% to bring production to 1.3mn tons from 0.9mn with targeted completion in late 2015. The shareholder structure for the new chemical complex in Vietnam (US$4.5bn investment, 1.4mn tons capacity), has been settled: SCC will hold 46%, Vietnamese partners 29% and Qatar Petroleum 25%. SCC will be in charge of operations, Qatar Petroleum will provide feedstock, both gas and naphtha (flexible feedstock: 0-70% gas and 30-100% naphtha), and the Vietnamese partners will handle local issues and regulations. It is waiting to open bidding for contractors and discussing the financing with lenders, expected to wind up in 1H15. The startup of new plant is planned for in 2019.

Paper unit (11% of 9M14 earnings). 

Packaging chain (80% of earnings): SCC expects high demand regional growth with greater expansion into packaging solutions, both paper and non-paper packaging (plastics). The fibrous chain (20%) will be moved to more high-margin HVA products after completion of the investment from Nippon Paper (30percent stake) in 2014. 

BUY; SOTP PT of Bt520. Time to accumulate: 1) 8% underperformance to the SET over six months; 2) YoY and QoQ earnings growth in 4Q14F: QoQ on seasonal dividend income and better chemical spread and volume and YoY without last year's chemical unit shutdown; 3) attractive valuation, trading at 14x 2015PE against 2-year EPS growth of 17%, from wider chemical spreads, higher non chemical volume and inorganic growth from new investments in ASEAN.