Despite the extended monsoon which led to a crash in cement prices in the region, India Cements has surprisingly posted results better than expected for the third quarter of 1998-99. In the period in which the operating margin for Madras Cements declined by 12 percentage points (compared to the second quarter), ICL's operating margin declined by just 1.35 percentage points. Though the net cement realisation for ICL is better than MCL, it makes up on cost.

The price per bag in the region was lower by as much as Rs 30 and hence it is hard to believe that the 4.5 per cent growth in the topline (compared to the second quarter) is due to cement volumes alone. In the third quarter, ICL sold 8.53 lakh tonnes of cement, compared to 6.94 lakh tonne in the corresponding period last year. But this is still lower than the 9.53 lakh tonnes sold during Q1, 1998-99. What contributed mainly to the bottomline was income from the real estate division, which at Rs 14.01 crore, was almost ten times theamount contributed by this division in 1997-98. Another contributing factor is the VRS introduced by the company in September 1998, resulting in a reduction of workforce by 961.

The third quarter performance has been affected mainly because of interest cost. The inflow of funds due to the rights issue should result in a lower interest outgo in the last quarter. The sale of shipping division to a subsidiary has been approved by the board. This is part of the funding for Raasi acquisition. If the sale is being made to a wholly-owned subsidiary, it is merely a glorified book entry. The stock has so far remained immune to the rallying market and the third quarter results are unlikely to make a difference to its discounting.

Cement prices

Cement prices have declined sharply from Rs 155 to Rs 130-135 per bag in Mumbai. This is a purely temporary phenomenon with the demand exceeding supply. But being the last quarter of the financial year, demand is likely to pick up and prices should be back to Januarylevels.

In Mumbai, which is a 2 lakh tonne per month market, excess cement being returned from Pune can play havoc.

The prices, however, are unlikely to show any major improvement anywhere in the country, except probably in the eastern region. The reason is that cement and clinker exports in 1998-99 is likely to register a negative growth of 30-35 per cent and already, supply exceeds demand. In the southern market, AP will continue to have the lowest prices because of the presence of more than 100 mini-cement plants.

Manufacturers in Gujarat are the most advantageously placed due to two reasons. One, because of port-based plants, freight cost can be kept to a minimum. Two, the superior quality of limestone. The entire belt enjoys the advantage of soft limestone with very high purity - almost 90 per cent. The companies resort to surface mining and not blasting. This keeps costs down to almost one-third of that in the south. The limestone cost for a south-based unit is as high as Rs 156, but for Ambuja,it works out to be less than Rs 60. This, despite the fact that in HP, where Ambuja's 2 MTPA capacity is located, the limestone is much harder.

One of the peculiar features of the industry is that exclusive dealership is not encouraged. The reason is, the marginal player extends a longer credit period. This enables dealers to pay the larger player (whose credit period is lower) even before the sale of the quantity for which the payment is being made. This cash management strategy comes handy, especially when the sales figures for the commodity ebb.

(With contributions from Urmik Chhaya)