The market cheered the December quarter’s first results from a cement company on Tuesday, although Prism Cement Ltd’s earnings per share (EPS) fell 52% compared with the same three months in 2007. The stock closed up 6.9% on the Bombay Stock Exchange, taking its gains to 22% in the past week and 44% in the past month.
The price spurt underlines the fact that the market has discounted much of the distress during the last quarter. Moreover, Prism’s performance did show some improvement.
For instance, although sales in the December quarter fell 5.5% year-on-year (y-o-y), they had fallen by a far higher 15.7% y-o-y in the September quarter—although one reason for the fall in sales in the September quarter was plant maintenance.
Similarly, although operating profit fell 37% y-o-y in the December quarter, it had fallen 63% y-o-y in the September quarter. Finally, the drop in earnings per share is also well below the y-o-y fall in EPS during the September quarter.
But then, stocks of all cement firms rose sharply on Tuesday. Consider Ultratech Cement Ltd, up 11.8%, Ambuja Cement Ltd, up 8.6%, ACC Ltd, higher by 7.7%, or Birla Corp. Ltd, up 7.3%. What’s more, most of these stocks have moved up smartly in the past month, with Shree Cement Ltd and Ultratech Cement going up by 47% each.
The main reason for the spurt seems to be ACC’s dispatches for December 2008, which increased by 21.9% y-o-y, leading investors to hope that demand has shown signs of reviving. That is unlikely and an analyst pointed out the main reason for ACC’s rise in volumes is the base effect, since its unit at Wadi, Maharashtra, which accounts for one-tenth of ACC’s production, was non-operational during a part of December 2007, and also because of expanded capacity from the company’s Lakheri factory in Rajasthan.
Moreover, ACC’s accounting year ends in December and there’s a year-end push to sales every year. Since ACC accounts for almost 12% of cement dispatches, its extraordinarily high y-o-y figure will show up as a high incremental number in the overall cement dispatches, giving rise to false hopes about a demand revival.
Prism, which has a plant at Satna in Madhya Pradesh and which caters to the Uttar Pradesh, Madhya Pradesh and Bihar markets, is unlikely to see any big rise in demand.
That said, it’s true that November and December have shown some momentum in cement dispatches. Cost pressures, too, are receding, with international coal prices and freight rates coming down.
Prism’s operating margin for the December quarter was 26.3%, much lower than the 39.4% margin a year ago, but far above the operating margin for the September quarter. On the other hand, the company has expansion plans in hand and is also investing in a general insurance subsidiary, both negatives in this environment.
The problem is that there’s a lot of cement capacity coming on stream at a time when the outlook for real estate is not looking good. Under these circumstances, the rally in cement stocks offers an exit opportunity to investors.
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