Mumbai: On the surface it appears as if India’s cement manufacturers are grappling with import duty cuts of 12.5% imposed by the government and preparing for competition from cheaper exports by rivals such as China in the international markets.
Yet beneath this apparent veneer of gloom, domestic companies, riding on an economy growing at over 9% per annum and real estate construction boom in India, have seen gross margins rise by almost 50% on a year- on-year basis.
While export gross margins of UltraTech Cement, one of the largest producers in India, for the quarter ended December 2006 went up by 4.3% to Rs2,167 per tonne, the domestic margins went up by 50% to Rs 3,019. Digvijay Cement too saw its domestic margins rise 30% to Rs2,783 per tonne.
This has started reflecting in their profits which seems to be growing twice to thrice the rate of growth in their sales. As a result, most brokerages have a buy on a good number of cement companies who occupy a sweet spot of the great Indian economic boom.
An analyst with Mumbai-based brokerage Motilal Oswal says, “We have a buy on all cement stocks except ACC.”
Indian cement companies have been taking advantage of the real estate boom in West Asia which has been fuelled by the spectacular rise in oil prices from under $40 (Rs1760) per barrel to over $60 (Rs254).
However, falling oil prices are likely to temper this rate of growth. “The exports to West Asia have come down because some plants have come up there itself. Moreover, Pakistan, which was an importer, has begun exporting,” says Sanjeev Bafna, joint president and deputy chief financial officer of Grasim Industries.
While quarterly earnings for other cement majors such as ACC and Gujarat Ambuja are yet to come out, analysts expect them to post a respectable increase in year-on-year domestic realizations too.
Stock prices of cement companies, which had fallen by 3% - 7% soon after the government announced cut in import duties have recovered most of their fall over the past couple of days.
An analyst for a Mumbai-based brokerage firm who tracks the cement sector forecasts that exports will fall as firms will divert more of their output to the domestic market.
For the nine months ended 31 December, cement manufacturers in India exported nearly 6.88 million tonne of cement as compared to nine million tonne of exports in the whole of fiscal 2005-06.