Cement firms could face pricing pressure with new capacity

Cement firms could face pricing pressure with new capacity
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First Published: Wed, Oct 28 2009. 11 23 PM IST

At par: Labourers unload cement from a truck in Gurgaon. Results of cement companies were in-line with expectations, say analysts. Adam Ferguson/Bloomberg
At par: Labourers unload cement from a truck in Gurgaon. Results of cement companies were in-line with expectations, say analysts. Adam Ferguson/Bloomberg
Updated: Wed, Oct 28 2009. 11 23 PM IST
Mumbai: Five companies that produce one-third of India’s cement, posted an average 59% increase in quarterly profit, though they could face pricing pressure as around 30 million tonnes (mt) of new capacity comes on stream.
Mumbai-based ACC Ltd, the largest of the five, recorded a 60% year-on-year rise in its second quarter net profit to Rs415 crore and Rajasthan’s Shree Cement Ltd’s net profit rose a whopping 170% to Rs289 crore.
At par: Labourers unload cement from a truck in Gurgaon. Results of cement companies were in-line with expectations, say analysts. Adam Ferguson/Bloomberg
Mumbai-based Ambuja Cements Ltd also reported a net profit of Rs 318 crore, a 27%, rise compared to Rs 250 crore in the same period last year. ACC and Ambuja are both controlled by Switzerlandbased cement supplier Holcim.
Chennai’s Dalmia Cement Ltd posted a 34% increase in net profit to Rs53.85 crore, though largely on revenue from its sugar business, which rose 85% to Rs116.73 crore, about 21% of its total revenue. India Cements Ltd, another Chennai firm, posted a marginal 2% rise in its July-September net profit to Rs137 crore.
Analysts said the results were in-line with expectations but warned the cement sector would face severe headwinds as it increased capacity.
“I expect 25-30 mt of capacity to be added between now and March-end and though there is some demand coming from government schemes, real estate and rural demand, it may not keep pace with the supply expected, especially in the southern market where prices have fallen by Rs35-45 per bag and are likely to continue to fall,” said an analyst with a private brokerage.
The slowing demand in the southern market has particularly hit India Cements. High growth markets such as Andhra Pradesh have been hit because government projects have been held up after the death of former chief minister Y.S.R. Reddy in a helicopter crash in early September.
“South-based players face more challenges than north-based players because of the huge amount of capacity added there. In markets like Andhra, there has been a huge demand erosion this year from more than 20% to almost nothing,” said another analyst with a Mumbai brokerage.
The two analysts did not want to be named as their company policy forbids them from speaking to the media.
N. Srinivasan, vice-chairman and managing director, India Cements, said in a conference call with analysts on Wednesday that though the latest quarter hasn’t been good, he expects higher cement prices from the home market in the second half of the financial year. “It is not that growth is not there, but there is also a huge amount of capacity addition in these markets. In Andhra, there has been a drop in prices but we are bottoming out,” he said. “Our expectation is once the new government settles down we should see some growth.”
H.M. Bangur, managing director at Shree Cement, said higher volumes and lower energy prices helped his company register a strong profit. “We saw demand from all sectors in this quarter, but I am not sure if we can repeat this performance in the next quarter because there is some excess supply lined up,” he added.
Shree Cement plans to increase its capacity to 10.5 mt from 9 mt by the end of the year.
In a short media release, ACC described outlook for the cement industry as “positive”. “On the supply side sizeable additional capacity is expected in all regions within the next year. Simultaneously, we foresee significant increase in demand from infrastructure as well as growth from smaller cities and semi-urban markets,” the company said.
ACC will add 3 mt of capacity between now and March, the company said.
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First Published: Wed, Oct 28 2009. 11 23 PM IST