Cement prices have moved up in the last three months. This has come as a relief for firms that have suffered from falling prices due to oversupply for the last six quarters. Production discipline by manufacturers, coupled with a demand pick-up, has brought an 8-12% surge in cement prices from the December price points.
So, the March quarter will register improved realizations for every tonne of cement sold compared with the December quarter. Revenues, in turn, are expected to grow by 10-12% from a year ago, with higher growth compared with the December quarter.
Improved cement prices have led to optimism on the Street. Shares of leading cement firms such as ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd have gradually inched up from precipitous levels in end-2010.
But southern firms such as India Cements Ltd and Madras Cement Ltd continue to underperform the broader market indices because of larger capacity additions in the region, as a result of which increase in supply outstripped demand.
Analysts say during fiscal 2011, industry capacity went up by about 28 million tonnes to 295 million tonnes; additions are also in the pipeline for the current year. Cement firms’ utilization during the March quarter on a pan-India basis could average 80%, higher than 76% in the preceding one, but yet to catch up with the year-ago levels.
Investment prudence suggests evaluation of cement firms on sustained profitability—whether realizations will outpace cost increases to deliver better investor returns consistently. For now, lower output and higher costs (given the jump in domestic and international coal prices and freight rates) are offsetting an increase in realizations.
For the March quarter, cement firms’ profit performance may be a mixed bag. Those such as UltraTech with coal stocks and pan-India exposure may not see a steep fall in operating profit margin (OPM). Southern firms, which had hit the abyss almost six quarters ago, are likely to post improved OPM both on a year-on-year basis and sequentially.
On an average, consensus estimates point towards improved operating profit per tonne on a sequential basis on the back of better cement prices. Nevertheless, a report from Alchemy Share and Stock Brokers Pvt. Ltd says Ebitda per tonne is not expected to recover to levels seen in last peak season of the fourth quarter of fiscal 2010. Ebitda is earnings before interest, taxes, depreciation and amortization and is a key indicator of a company’s profitability.
Interest in cement stocks will sustain at least in the first six months of the current fiscal, as pan-India cement prices may rise until the monsoon. But, for a sectoral re-rating, demand has to play catch-up to balance the supply equation.
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