With a total capacity addition of 30 million tonne (MT) in FY08, the 198 MT Indian cement industry is going through challenging times due to pressure on prices and rising input costs. Experts say that cement companies are expected to post a decline in their margins and will see a de-growth in bottomline in Q1 of FY09. However, the topline is expected to grow marginally due to volume growth and firm prices.
Says Pawan Burde, an analyst with Angel Broking, ?Cement stocks have been underperforming the broader market since the past several quarters due to the fear of oversupply and rising input cost. The sentiments rolled over in Q1FY09 as well, leading to severe underperformance of cement stocks. Cement stocks underperformed the market in a big way with the relative fall of 15 to 25% for large cement companies.?
Moreover, experts believe EBITDA margins for the companies are expected to decline on a YoY basis, as cement prices have remained stable despite significant cost push in the form of energy and freight cost. Coal prices, both domestic and imported, are on an uptrend. Imported coal prices have gone up by around 14% QoQ.
Although domestic coal prices have remain unchanged, reduction in linkage by Coal India would push total cost of coal as the companies will have to procure expensive coal from the open market (30-40% higher cost), thus pushing the overall cost up at least by Rs 30-40 per tonne.
Motilal Oswal in its report said ACC would be severely hit by reduction in linkage by Coal India thereby resulting in increased sourcing from the open market (30 to 40% higher than linkage price).
Further, increase in freight cost (6 to 10%) due to increase in diesel prices would also impact the company?s profitability.
The report further mentions that Ambuja Cements Ltd volume growth this quarter could be impacted due to ban on exports and the Gujjar agitation in North India.
Despatches during the quarter grew 7.1% yoy at 43.5mtpa (40.6mtpa). Production during the quarter clocked relatively slower growth. Exports declined by a substantial 70% during the quarter at 0.3mtpa (1mtpa) due to the ban. However, the ban on exports has been relaxed at the Gujarat Ports and to Nepal. Cement prices were firm during the quarter albeit with some downward pressure.
?We expect most cement universe to report 1.5% volume growth, primarily driven by strong volume growth of 21% for Shree Cement. Other cement companies under our coverage are expected to report muted volume growth, as they are operating at optimum capacity,? said Jinesh Gandhi, analyst with Motilal Oswal in its report.
Going forward, experts believe that the prices of the commodity will remain stable as with high inflation, cement companies were under pressure to maintain prices. However, the industry does not rule out marginal and gradual increase in prices to offset cost push.
