Lower costs boost profit margins for Heidelberg Cement

Net realization improved about 3.5% from a year ago as cement prices in central India, where most of its revenue accrue from, have been on the rise


Operating margin at HeidelbergCement India fell short of investor expectations.
Operating margin at HeidelbergCement India fell short of investor expectations.

HeidelbergCement India Ltd, the Indian arm of the German cement maker, turned out better-than-expected revenue growth for the June quarter, but failed on profitability.

The 7% jump in net revenue, which beat Bloomberg’s consensus estimates, was the result of both better demand and higher cement prices. Net realization improved about 3.5% from a year ago as cement prices in central India, where most of its revenue accrue from, have been on the rise. Robust demand translated into higher cement sales.

Further, in line with the industry trend, the firm gained from lower power and fuel costs, which dropped by 460 basis points (bps) during the quarter. Freight costs and other expenses were lower, too. Operating margin, therefore, widened by 130 bps; it, however, fell short of expectations. Analysts say this was because the realization on sales was lower than estimates. One basis point is one-hundredth of a percentage point.

As a result, even the operating profit at around Rs.80 crore was lower than consensus Bloomberg analysts’ estimate. The stock, therefore, closed lower on Friday, although it has outperformed the Nifty midcap index by a wide margin in the last few months.

However, this is unlikely to dampen investor sentiment. A report by Prabhudas Lilladher Pvt. Ltd adds that pre-election spending in the run-up to the Uttar Pradesh elections in 2017 should keep demand buoyant. This, coupled with efficient operations and limited capacity addition in the region, will translate into strong earnings growth. A re-rating in the stock cannot be ruled out.

But there may be some rough patches in the near term as cement prices are likely to soften because of a heavy monsoon. Further, its high capacity utilization of 80-85% and the fact that it has not lined up any major capacity addition could cap revenue growth, even if demand picks up.

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