Sep 15 2013 , Mumbai
The cement industry’s woes have just spilled over to another quarter as an expected revival in demand got delayed leaving no room for a price hike despite a big jump in input cost
Industry watchers say demand will remain stressed in the near term, but will recover from around mid-October. They expect demand to start picking up by the yearend on the back of better rural consumption and pre-election infrastructure push.
Usually, cement companies start raising prices by the end of August or early September as monsoon gets over and demand starts picking up on the back of revival in construction activities in the real estate and infrastructure sectors. This was not the case this year.
“We are going to see one more bad quarter, that is July-September, as monsoon started early this year and was uniform across the country. Demand continues to be slow at the moment,” said Vinita Singhania, managing director of JK Lakshmi Cement.
The past few quarters have been bad for the cement firms, as they failed to pass on the rise in input costs to consumers due to subdued demand and this has hit profits significantly. Singhania said in all probability prices would start going up from October as demand is expected to pick up.
Rajesh Kumar Ravi, an analyst at Karvy Stock Broking, said, “Usually, cement companies start increasing prices from the end of August or early September. But demand has been exceptionally low this year. Although a few companies were contemplating price hikes, but they could not do so in view of subdued demand across the country. We do not expect prices to go up before October.”
Ravi said profits and margins of cement firms were impacted significantly during the April-June quarter and the situation is unlikely to improve in the near future.
In June quarter, the Holcim-controlled ACC and Ambuja Cement — the country’s largest cement producers — saw significant drop in profits. Other companies such as JK Lakshmi, UltraTech and Grasim also posted declines in net profits for the quarter. The cement companies said demand was lower than expectations, leading to a drop in profit. All the companies had cautioned about the challenging environment and projected demand to remain subdued in the near future.
A senior official from the Cement Manufacturers Association said demand has been exceptionally lower this year and inventory is on the higher side. Cement plants are operating at around 70 to 75 per cent capacity on an average.
However, the cement firms are pinning their hope on the after-effect of a good monsoon across the country, which is likely to revive demand from the rural areas. In many parts of the country, monsoon is not over yet.
Vinod Juneja, MD of Binani Cement, said: “At the moment, demand is under pressure across the country, but the situation is expected to improve from October. Pre-election year infrastructure activities are likely to pick up and we expect to see revival in demand by year-end.”
Ravi said, “Although demand continues to be low at the moment, prices are expected to go up from October. There are several factors that would drive demand from October. A healthy monsoon resulting in a strong rural economy, revival in demand from the urban areas due to festive season and also expected infrastructure push in a pre-election year are all likely to drive demand.”
Meanwhile, the industry continues to witness consolidation. After Holcim engineered a complex merger of ACC and Ambuja, the debt-ridden Jaiprakash Associates finally managed to sell its Gujarat plants to UltraTech after almost a year of negotiations. “At this point, it is difficult to find a buyer who would offer good valuations. However, the company managed to get a decent deal and will be able to reduce its debt,” experts said.
Analysts feel that both the companies would benefit from the deal, as Jaypee Cement would be able to reduce debt while UltraTech would be able to expand its capacity, which would be profitable for the company going forward. As part of the deal, UltraTech will pay Rs 150 crore as equity while the remaining Rs 3,650 crore will be debt transfer from the books of the cement unit as well as its holding company.
Kumar Mangalam Birla, chairman of UltraTech, said the value works out to $124 per tonne of capacity at the rupee rate of 64 to the dollar. He said 50 per cent of the deal would be done through debt and the remaining through internal accruals. This would help the company gain a higher market share in the western region. “Besides giving us a stronger production base in Gujarat to serve the local market, it will also bolster our coastal footprint, enabling us to cater to other regions and the export market,” Birla said.
UltraTech sounded bullish on the prospects of the industry, saying it is constantly on the lookout to acquire more plants — both at home and overseas — in order to increase capacity and market share. Heidelberg Cement, another major player, said it would prefer the acquisition route rather than setting up a new unit as buyouts are getting attractive.
Driven by strong GDP growth, cement demand in India has been growing at a CAGR of 9 per cent over the past decade. Cement demand is closely linked to the construction sector, which in turn has strong correlation to GDP growth. There has been an increased focus on infrastructure development along with a sharp jump in demand from the housing and industrial sectors. This is drawing potential investors to the sector.
However, analysts said given the slowdown in demand, a few more companies might want to sell off their assets, but are not being able to do so as they are not getting the right valuation at the moment.
Weak sales volumes, a drop in margins and high stock valuations have hurt sentiments on the cement counter this year. Stocks of cement makers such as JK Lakshmi Cement, JK Cement, India Cements and Mangalam Cements have lost 56.25 per cent, 47.74 per cent, 45.12 per cent and 44.04 per cent, respectively, of their market value year-to-date. Shares of Prism Cement, Andhra Cements and Heidelberg Cement have dropped 41.02 per cent, 40.33 per cent, 36.94 per cent, respectively. Large players such as Madras Cements, ACC, Shree Cement, UltraTech Cement and Ambuja Cements have seen their stocks fall between 10 per cent and 30 per cent. zz