Cement firms’ profit to jump, growth seen slowing

Cement firms’ profit to jump, growth seen slowing
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First Published: Tue, Apr 17 2007. 02 40 PM IST
Updated: Tue, Apr 17 2007. 02 40 PM IST
Devidutta Tripathy, Reuters
Mumbai: Indian cement companies should report strong quarterly earnings as they ran plants at full capacity to feed the fast expanding economy, but the outlook for profit growth this year has been clouded by a government freeze on cement prices.
Industry sales volume rose an estimated 7% to 7.5% in January-March from the same period a year earlier, while cement prices jumped nearly a quarter amid rising investment in infrastructure such as roads, airports and houses.
But last month the government, worried about stubbornly high inflation, forced cement companies to forgo any price rises for a year even if input costs such as power or transport went up. It also removed duties to help imports and bring domestic prices down.
Analysts said this would spoil the party for cement firms, which had been posting strong earnings for more than two years after struggling since the late 1990s because of excess capacity. Hitesh Agrawal, analyst at Angel Broking, said he expected sector profit to grow 5% to 10% in the fiscal year to March 2008 because of the price freeze, down from a 24% to 30% rise he forecast earlier that had assumed a 10% price increase.
Another analyst estimated margins would drop by 200 basis points in 2007/08, assuming a 5% increase in costs.
However, earnings in January-March are expected to show a big rise. ACC Ltd, the No. 2 producer, should report on Thursday that quarterly profit rose by half, a Reuters poll showed.
Third-biggest producer Ambuja Cements Ltd, formerly Gujarat Ambuja, is expected to post on Friday a 28% rise in earnings, excluding one-time gains.
Swiss firm Holcim Ltd holds nearly 38% of ACC and about 28% in Ambuja Cements.
Diversified Grasim Industries Ltd, which gets more than 60% of its revenue from cement, is expected to report on January-March profit rose 69.6% while its subsidiary UltraTech Cement could see profit more than trebling.
Grasim, together with UltraTech, both controlled by India’s Aditya Birla group, is the biggest cement producer.
Although demand in India is expected to expand 10% annually over 2007-10, brokerage SSKI Securities said supplies from new capacity would rise 12.9% over the same period.
“The resultant surplus in the domestic market would likely drive down cement prices by 7% to 15% in FY09,” SSKI said, adding that earnings could fall 19% to 34% in 2008/09.
In comparison, cement demand grew more than 10% in the past two years, while capacity additions have been limited. This helped push prices up by about 30% in 2006/07.
India has more than four dozen cement makers running about 365 plants with a capacity to make 165 million tonnes a year. Producers have announced plans to add nearly 100 million tonnes of additional capacity by 2009/10.
Grasim’s shares fell 25% in the March quarter, ACC’s dropped more than 32%, Ambuja’s lost nearly 25% and UltraTech’s shed almost 30%, compared with a 5.2% loss in the broader market. Government moves to cut duties and a global equities sell-off in late February sparked most of the losses.
“There is no case for investment in cement stocks despite the valuation of some cement stocks turning attractive,” Angel’s Agrawal said in a note, adding cement prices could soften in coming years and squeeze profit growth.
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First Published: Tue, Apr 17 2007. 02 40 PM IST
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